Various literatures have been published to expound on the intricacies that revolve around the craze upon which contemporary business firms implement strategies aligned to corporate philanthropic and social responsibilities. In doing so, some of the evaluations have been aimed at analyzing the existing correlation between Corporate Social Responsibility (CSR) and the eventual gain achieved by the business firm in terms of profitability and attaining the wealth maximization goals of the firm’s shareholders. As the aim of this literature review, the assessment will take into account literature that expound on the gainful CSR activities that eventually help a business firm record higher profits, and the deceptive engagement into philanthropic activities that will often lead to reduced profits or rather insignificant difference to the firm’s financial performance. The effect on shareholder’s wealth should also be viewed in two different perspectives, first being the gainful increase in profits that trickle down to increased earnings per share paid out to every shareholder at the end of the year, or the resultant increase in stock prices that generally increases the wealth of the investors owning shares of the business firm.
According to Roberts & Dowling (2012), the founding block of a good CSR campaign is to cultivate a goodwill with the consumer market and maximizing on the positive reputation to achieve positive financial implications in engagements done with other stakeholders. However, in engaging company resources such as manpower or financial backing, the management should have an overall strategy that guides the company to ultimately make even with the capitalism of the contemporary economic environment and the going concerns of the business firm. To achieve this, the authors identify the resultant reputation created from philanthropic activities to nurture competitive edge over other firms, leading to increased sales. This will essentially lead to increased profits, which can then be explained to the shareholder’s as an essential consequence of increased engagement in social philanthropic activities.
In the same article, Roberts & Dowling continue to explain the relevance of a business firm engaging in CSR activities by highlighting the potential tax benefits that a firm can accrue. Such tax benefits help reduce the final tax burden that a firm would have had to incur from their yearly profits, thus positively affecting the earnings that are paid to the shareholders of a firm. Recent tax guidelines have allowed room for certain philanthropic activities within the social welfare to be allowed as deductible business expense, which is also a program that the government continues to promote as changes in the Companies Act requires firms to allocate 2% of the annual profits into CSR activities. In this sense, the companies engaging in CSR activities are assumed to be taking charge of some activities that should have been the mandate of the government. The increased engagement of the government in a company’s operations is also a form of corporate strategy to protect the company from unnecessary government regulations and tax liability, which will finally have a progressive effect on the shareholder’s wealth (Roberts & Dowling, 2012).
Conferring on an article titled, The competitive advantage of corporate philanthropy, written by leading economist Nazeer S. in 2013, different forms strategic philanthropic activities are highlighted to show different ways through which a firm can maximize on the nature of the CSR activities they decide to partake in. For instance, venture philanthropy which can be defined as firm’s engagement with surrounding community organizations to channel financial and non-financial aid with the aim of promoting the organization’s cause within the society. Shareholder’s wealth maximization goals can be achieved through implementation of this strategy in areas where a firm heavily relies upon for major supplies to the manufacturing plants. In doing so, the company will be creating a positive reputation within the area, which will ascertain the supply of raw materials while still enabling the company an upper hand in making bargains. When the costs of production are reduced, the resultant effect will lead to increased profits for share to the investors and a conducive environment for future operations of the firm within the community surrounding the firm’s manufacturing plants.
In another context, CSR activities provide an enhanced form of marketing and advertising that would not generally involve similar characteristics. This provides the management with an option of dialing down on expenses made towards the firms marketing department, thus saving the shareholder finances that can be redirected towards growth or to their pockets. Gao et.al (2012) provide further in-depth information in regards to this approach, using an example of philanthropic activities carried out by firms in China. It is important to note that essentiality of this approach is as cause-related consequence rather that consequence driven, as it revolves around a national calamity happening, the 2008 earthquake. This is important because it could create negative backlash within the public if the corporate social responsibility activities are viewed to have been driven by self-indulgence. In this study, the researchers did an evaluation of various firms in the Chinese market after the Wenchuan earthquake, noting the companies that got involved in the rescue process and donations to the affected areas.
Results showed an increased stock returns to the shareholders of the companies that had been involved within the next 12 months of operations. According to the study, this could be attributed to the unorthodox advertisement effect of the firms’ direct involvement during the crisis and supportive donations made towards the cause at the time. It is believed that firms brand awareness and image in the market had improved significantly across the consumer markets. In the long run, consumer demand for products and services from these companies had increased, with the increased revenue enhancing the profitability of the firms, while still accounting for the enhanced goodwill that positively affects the stock prices.
The relevance of CSR activities to shareholder’s wealth has also been further explored by McWilliams et.al (2006), illuminating the apparent effect that CSR has on future mitigating risks in the occurrence of a bad action by the firm. CSR strategies provide a safe landing zone for firms when faced by negative assessments from a gone wrong brand image due to unethical practice by the firm. In this case, the initial positive moral goodwill that had been earlier created through philanthropic activities helps the firm to mitigate the apparent negative effects that could arise due to the current negative goodwill. In this sense, the company could alleviate a huge loss that would have been passed across to the shareholder’s wealth, presenting corporate social responsibility as a possible insurance against future risks. In the long run, a business firm that continuously cultivates a positive goodwill within the consumer market could afford to take a negative hit to their brand image if the perception of the consumers is already fixed to viewing the company as a virtuous organization that helps in various philanthropic activities.
On the other hand, there exists a number of literature that continue to argue towards the non-effectiveness of philanthropic activities being carried out by firms. As will be explained, the researchers draw their conclusions from various cases showing no apparent gain by firms by engaging in CSR activities. The nature of CSR activities is classified as a non-consequential activity towards the profitability aims of a business organization, which has been founded with the goal of achieving the visions of the shareholders, rather than creating a perceived goodwill within the market.
One such scholar who has well documented his views on corporate philanthropic activities is Krüger P, in an article titled, Corporate goodness and shareholder wealth (2015). In this article, the first major roadblock to effective implementation of a CSR strategy by an organization is the conflict raised by the nature of CSR activities and the fiduciary duty that a business firm has to its shareholders. The existence of business firm is founded upon the need to minimize business expenses while maximizing the profits and wealth of the shareholders. In essence, when the management puts in place programs that will inherently lead to lower profits due to the increased expenses, then it is within the shareholder’s powers to terminate the director’s contract. This creates a conflict of interest between the day-to-day staff of the company and the shareholders. The author highlights the apparent gain that the directors are likely to gain from managing a company that has a high rating in relation to CSR, while the shareholders will be concerned with the high expenditure related in achieving such positive index.
Another conflict raised by Krüger P (2015), is towards the essence of doing further advertisement of a firm’s engagement in corporate social responsibility activities to be able to reap the benefits associated with a positive reputation. From this argument, it is clear that a firm will incur additional costs to the allocated philanthropic budget, to communicate their involvement in the community activities. This increased expenditure negates the potential benefits that a firm would reaped. The arising conflicts due to the engagement of CSR strategies has led to various shareholders opposing any outlandish expenditure on CSR. The introduction of international and national regulations that requires business firms to pay certain amounts of money towards given projects, such as environmental pollution, has also led business owners to shy away from corporate social responsibility activities as they view them as double expenditure on the same cause.
Additionally, from this literature, there has been no solid factual basis that proves the correlation between CSR and improved profitability levels. The nature of arguments that identify the reputation or creation of goodwill can be faulted since it does not take into account the background of the companies involved or the stage of the development cycle that a company is undergoing. The ability of a CSR activity to gainfully effect the shareholders wealth is hinged upon the company operations, major areas consumer market, and the degree of financial aid directed towards the cause. This means that in the end, it is the financial performance of a company that will often determine the levels of CSR participation, rather than the use of CSR strategies to drive growth and profitability.
Another setback identified towards the wealth maximization goal of shareholders can be traced to the disproportionality when evaluating small and middle-sized companies within the economy. According to Ryu & Hwang (2016), the concept of CSR and its correlation to profitability is more of a theoretical concept that requires further tracing that consumes supplementary resources to fully quantify the financial gain to shareholders. However, in the case of SME’s, the owners do not necessarily have the same financial backing to do this. The whole process of allocating and reporting of corporate social responsibility activities would prove to be an additional financial expenditure that small business owners would rather forego, creating an uneven playing field with the other bigger organizations in the same industry.
In conclusion, from all the pieces of evidence provided above from different kinds of literature on CSR and its apparent effect on shareholder’s wealth, the underlying factor remains that each organization should create a strategic plan that recognizes the firm’s financial muscle, current reputation and the future plans to budget for corporate social responsibility and philanthropic activities. The essence of corporate social responsibility is to forge a conducive environment for a firm’s product and services within the consumer market to align with the shareholder’s objectives, while still maintaining the right balance of a positive consumer relations or goodwill.
Roberts, P. W., & Dowling, G. R. (2012). Corporate reputation and sustained superior financial performance. Strategic management journal, 23(12), 1077-1093.
Nazeer, S. (2013). The competitive advantage of corporate philanthropy.
Gao, F., Faff, R., & Navissi, F. (2012). Corporate philanthropy: Insights from the 2008 Wenchuan earthquake in China. Pacific-Basin Finance Journal, 20(3), 363-377.
McWilliams, A., Siegel, D. S., & Wright, P. M. (2006). Corporate social responsibility: Strategic implications. Journal of management studies, 43(1), 1-18.
Krüger, P. (2015). Corporate goodness and shareholder wealth. Journal of financial economics, 115(2), 304-329.
Ryu, D. & Hwang, J. H. (2016). Corporate social responsibility, market competition, and shareholder wealth. Investment Analysts Journal, 45(1), 16-30.