Why corporate social responsibility pays off
Prof. Ross Levine was deep into research on how competition affects corporate social responsibility (CSR) when the coronavirus pandemic triggered an abrupt global economic freeze. With a database containing detailed characteristics of more than 6,000 companies in 56 countries at his fingertips, he and colleagues were able to quickly analyze which companies’ stocks seemed to have more immunity to the pandemic-induced crash.
What they found surprised him.
“I thought that COVID-19 was going to have such pervasive effects that identifying one firm trait independently of everything else about the firm was very unlikely,” says Levine, the Willis H. Booth Chair in Banking and Finance. “We found that companies that had invested more in corporate social responsibility before the pandemic enjoyed much better stock price performance in response to the pandemic.”
In fact, stocks at companies with high CSR scores—as measured by the corporation’s commitment to creating safe, healthy workplaces; engaging in ethical business practices; providing enduring, reliable services to customers; and employing environmentally friendly and sustainable practices—dropped an estimated 19% less than those with low scores.
Several other factors helped buffer the downturn. Stocks of companies with higher debt and smaller profits dropped more than those with more cash on hand, and companies with higher exposure to the virus through their dependence on supply chains or customers in countries with more COVID-19 cases also took larger hits than those with less exposure. Ownership also mattered: Greater ownership by hedge funds drove down stock prices, while the presence of large nonfinancial corporate owners seemed to provide a ballast.
The finding provides a backdrop to further research by Levine that increased competition may actually spur companies to increase their investments in CSR. To maximize profitability in the long term, firms may be motivated to form stronger bonds with workers, suppliers, and customers.
“Many influential economists believe that firms invest in CSR because the executives simply want to look good in the community, which could weaken the firm,” Levine says. “Our results are consistent with a different view. Investments in corporate social responsibility build trust with stakeholders so that workers, suppliers, customers, and other stakeholders are more willing to support the business—boosting long-run profitability and allowing the firm to survive crises when the going gets rough.”