In the posting below, CIR Intern Angela Liu, (GWU, MSF, 2011) compares two recent papers on CSR.A web article from Ioannis Ioannou, Assistant Professor of Strategic and International Management at London Business School, asks "Is there a link between a company's social responsibility and its profitability?" The second study reviewed is the Boston College 2010 Corporate Social Responsibility Index.
A Comparison of CSR Methodologies
Both studies focus on how to measure and value corporate social responsibility (CSR). Both show how difficult it is to precisely measure the exact economic value of CSR, but both also use methods that highlight the intangible value that social responsibility might actually bring to a given firm.
External and Internal Aspects
The research from the London Business School mainly focuses on the internal aspects of CSR. The authors have collected data since 1990. They use this data to study the key ways that a firm can transfer CSR information to capital markets in an attempt to increase economic value. In this research, the authors suggest there should be a number of intermediaries and institutions involved in the CSR information dissemination process. They found that sell-side analysts are an important information intermediary and found a vast set of literature examining sell-side analysts' role and their impact on stock prices: sell-side analyst recommendations and long-term growth forecasts reflect, at least to an extent, expectations about value-creation at a given firm. These forecasts are starting to include CSR related data.
The LBS research shows there are three key ways to measure the benefits of CSR: better understanding of the firm, providing more detail on resources and explaining CSR initiatives.
Better understanding. An analyst consistently follows and does research on a firm; with added CSR related information, he or she might better understand a given firm's long run strategy. Further, he/she may be able to better understand how the firm's CSR strategy can benefit the firm.
Resources. The larger a given firm, the more resources it can provide to analysts seeking to include CSR related data in the valuation process. For example, a given firm might purchase CSR related data from other professional institutions or hire experienced CSR professionals to help integrate and disseminate the data.
CSR initiatives. Analyst CSR awareness may be based on the total number of firms an analyst is following and how CSR-sensitive she/he is. If CSR awareness is high, the analyst will be able to better value and describe how CSR benefits of a firm.
The Boston College 2010 Corporate Social Responsibility Index
The Index uses external data to measure the marginal value to a firm from making social responsibility-related activities part of its operational strategy. The authors believe that a firm gains from social responsibility-related activities because these activities help reinforce a more positive general reputation. Reputation is evaluated by collecting and reviewing information concerning external views of the firm, rather than via analyst measurements from internal sources.
The corporate social responsibility index contains seven elements: Products/Services, Innovation, Workplace, Governance, Citizenship, Leadership, and Performance. According to this research, the relationship social responsibility and reputation is positive; the relationship between reputation and consumer support is positive. Therefore, if a firm has higher social responsibility, it obtains a better reputation and more consumer support. This also implies that social responsible behaviour on the part of a firm can generate actual economic benefits.
In their evaluation model, the Boston College researchers use a survey tool, a questionnaire, to determine the reputation of a firm. A higher score means the firm posses a higher, better reputation. As a final step, the authors use the survey results to determine the link between social responsibility and economic value.
Pros and Cons
| | Pros | Cons |
| LBS | l Internal Information on a Company l Longer-term Observations Experienced analysts l Bigger firms have more precise measurement of CSR benefits | l Information Credibility l Can’t show the short-term effects when company adopts a social responsibility policy l Credibility of Analysts l Not suitable for small firms |
| Boston College | l Based on external reputation l Once a year l Firm can improve via marketing l Questionnaire are easy to collect and score l Only bigger firms included (selected by total assets) | l Short-term rating and performance of firm l Biased Marketing l Possibly unreliable questionnaire l Can’t apply to small business |