Asked about the social responsibility of corporations, economist Milton Friedman once stated, “a corporation’s responsibility is to make as much money for the stockholders as possible.” This sound byte was immediately polarizing as many interpreted it as callous or excessively capitalist – money over ethics, essentially. However, it’s probable that Friedman’s perspective on corporate responsibility wasn’t quite as harsh as some made it out to be. The lesser known part of that quote is its ending: “so long as it stays within the rules of the game.” He went on to argue that the framework of law should compel companies to behave responsibly, to a certain degree. Much less controversial in its entirety, Friedman wasn’t calling for profit over anything – more so, he was noting the critical element of profit within a corporation.
But what if investors want to go a step further than simply ‘staying within the law’ and choose to explore opportunities that align with their personal ethics and values? That’s when corporate social responsibility takes on new life and meaning. Value-based investing is growing in popularity, particularly among younger investors. Today, we’ll offer a brief overview of how this corporate social responsibility affects profit.
Companies – and investors – that care
More and more, investors are drawn to companies that are transparent in their ethics and relationships. For example, more investors are actively avoiding corporations that have ties to environmental destruction, weapons, child labour, human rights violations or perhaps even cigarettes and alcohol. Corporate social responsibility calls for investors (and money managers) to address and acknowledge externalities as well as profit. This approach attracts a certain type of investor, and sometimes, even becomes a tool for activists. Shareholder activism is when investors place pressure on a company to adhere to specific standards – environmental, humanitarian or otherwise – using their stake in the company as leverage to reach their ethical goals.
How social corporate responsibility impacts profit
There is research that indicates a correlation between social corporate responsibility – and to some extent, environmental responsibility – and higher profits. Companies that integrate social impact into their business plan can enhance sales by around 20%, increase productivity, reduce employee turnover and improve their reputation as well as their financial position. Perhaps even more interestingly, company share values generally increase around 6% when socially responsible business practices are introduced. These businesses are also more successful with millennial investors who prioritize ethics as well as investment income.
The bottom line
Socially responsible companies do, in fact, see a measurable increase in profit. What is unclear is exactly why this correlation exists. It has been speculated that higher earning companies have the means to behave in a more socially and environmentally-friendly manner, explaining the link between the two, but also speculated that corporate social responsibility leads to higher profits. While difficult to prove causation, the link exists and deserves consideration.