Does Corporate Social Responsibility (CSR) create value is an unresolved question. Many people have stated that the only responsibility of corporations is to create shareholder value. However, CSR as we now know, involves the actions that corporations take to create value for the society. Some of these actions are treating employees well, not producing sinful products (e.g. tobacco), donating money, or being more eco-conscious.
If CSR does not lead to the increase in shareholder wealth, then CSR should be abandoned. In such a case, the resources consumed by the CSR activities will not be put to the best possible use and the resource allocation will not be optimum. However, if CSR leads to maximized shareholder value, then CSR must be undertaken because it is the best possible use of the resources. The question, then, is Is CSR just a a fancy name given to the standard business practices? For example, consider a firm that invested into an effluent treatment plant that reduces the pollution to a level lower than the minimum required by the law. Is it CSR? It sounds like CSR, but it can be a sound business decision based on the expected changes in the legal limits to pollution! But if the firm spends excessively in pollution control, thereby increasing the costs and reducing the profits, it will be an utter waste of the money which could have been used for alternative value enhancing uses. In that case, would the CSR somehow increase the firm value? How?
There are many unanswered questions. Is competition OK for CSR? By competing fiercely with its rivals, a firm may force its rivals to close down. Many employees working at the closing firm may lose jobs. Is that against CSR? How much effort should be put into CSR? Is there any optimum level? If yes, what is the economic rationale for deriving such an economic model? Does high level of CSR also indicate high levels of agency problems? Do the charitable firms buy the goodwill (like Goldman Sachs is accused of doing) by donating few hundred millions to general public? Can a charitable donation that is not made public by the firm bring the same benefit as a publicized donation? If no, then which one is a better CS Performance (CSP)?
To close the blog, nothing better than Milton Friedman!