Corporate Responsibility and Financial Performance: The Paradox of Social Cost

Corporate Responsibility and Financial Performance: The Paradox of Social Cost

Corporate Responsibility and Financial Performance: The Paradox of Social Cost

Corporate Responsibility and Financial Performance: The Paradox of Social Cost

Synopsis

The core idea of corporate social responsibility, the notion that companies have a responsibility beyond legal requirements, is by now deeply embedded in the corporate cultures of the largest U.S. companies. The authors suggest that productive debate now focuses on the following two issues. First, what are the impacts of existing corporate social responsibility programs for the corporation? And, second, what constitutes the precise contours of this responsibility? This book explores these two themes. The issue of how corporate social responsibility affects individual companies engaged in socially responsible activities is not well understood. Further, the distinction between legitimate and illegitimate corporate social responsibility activities has not always been clearly drawn. This book, therefore, is designed to fill in some of the gaps in our understanding. This is done by carefully organizing and reviewing the relevant and growing literature on corporate social responsibility. In addition, this book reports on the results of two original empirical studies designed to further explore the relationship between corporate social responsibility and traditional financial performance. This book has profound implications for business executives and researchers in finance, accounting, business ethics, and business and society.

Excerpt

It is generally assumed that common stock investors are exclusively interested in earning the highest level of future cash flow for a given amount of risk. This view suggests that investors select a well-diversified portfolio of securities to achieve this goal. Accordingly, it is often assumed that investors are unwilling to pay a premium for corporate behavior that can be described as socially responsible. Under the traditional view, to the extent that corporations engage in costly behavior to achieve socially responsible goals that cannot be translated into higher cash flow in the future, investors would be expected to place a lower value on corporate securities.

Recently, this view has been under increasing attack. Apparently, many investors, including both large institutional investors and individual investors, are concerned about a much larger set of corporate priorities. According to the Social Investment Forum, at least 538 institutional investors now allocate funds using social screens or criteria. For example, the Teachers Insurance and Annuity Association and College Retirement and Equities Fund, with assets of about $9 billion, uses corporate social responsibility (CSR) performance as an additional screen in making investment decisions. In addition, there are now numerous mutual funds that are designed to satisfy the demands of socially responsible investors. A study by the United States Trust Company of Boston conservatively estimated that at the end of 1985 about $100 billion in funds were managed under at least one form of social criteria. Mitchell Investment Management, using a less . . .

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