csr & profitability

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May 26, 2011

Does Corporate Social Responsibility Increase Profits?

Ron Robins

Founder & Analyst

Investing for the Soul

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It is generally held that corporate social responsibility (CSR) could increase company profits and

thus most large companies are actively engaged in it. But few executives and managers are aware of

the research on this important subject. And as I review here, the research does show that it may
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analysis on CSR and its link to profits won the famed socially responsible investing, Moskowitz Prize

in 2004. The study, Corporate Social and Financial Performance: A Meta-Analysis, was compiled by

researchers Marc Orlitzky, Frank L. Schmidt and Sara L. Rynes. It yielded encouraging data

suggesting a positive link between CSR and increased profits.

Summing up their results, the researchers said, we conduct[ed] a meta-analysis of 52 studies (whichrepresent the population of prior quantitative inquiry) yielding a total sample size of 33,878

observations. The meta-analytic findings suggest that corporate virtue in the form of social

responsibility and, to a lesser extent, environmental responsibility, is likely to pay off CSP

[corporate social performance] appears to be more highly correlated with accounting-based

measures of CFP [corporate financial performance] than with market-based indicators, and CSP

reputation indices are more highly correlated with CFP than are other indicators of CSP. This meta-

analysis establishes a greater degree of certainty with respect to the CSP-CFP relationship than is

currently assumed to exist by many business scholars.

So the research generally indicates that CSR/CC/CSP, no matter how you define it, does offer

potential benefit to corporate profits. But there is another unanswered problem, and that relates tocausation.

Do high profits enable greater spending on CSR, or is it that CSR itself creates higher profits?

Referring again to the study, The Economics and Politics of Corporate Social Performance, the

researchers write that, the direction of causation remains an open question. That is, good CSP

could cause good CFP, but good CFP could provide slack resources to spend on CSP. As the

Economist wrote, whether profitable companies feel rich enough to splash out on CSR, or CSR

[activity itself] brings profits. Hopefully, future research will be able to answer this question.

On balance, surveys and the research literature suggest that what most executives believe intuitively,

that CSR can improve profits, is possible. And almost no large public company today would want tobe seen unengaged in CSR. That is clear admission of how important CSR might be to their bottom

line, no matter how difficult it may be to define CSR and link it to profits.

Ron Robbins is Founder and Analyst ofInvesting for the Soul.

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