Can Corporate Social Responsibility Be Profitable?

Corporate social responsibility (CSR) has been increasing as a focal point for stakeholders and companies alike for the past several years. Among the largest 100 U.S. companies surveyed in 2013, 86 percent reported on CSR, up from 83 percent in 2011 and 74 percent in 2008.¹

However, some people have been skeptical of CSR’s viability in a competitive environment. A few studies have attempted to uncover conditions where CSR can be economically justified. A past article in The Regional Economist by Senior Economist Rubén Hernández-Murillo and former Research Associate Christopher J. Martinek looked at a pair of these studies.

CSR and Maximizing Profit

Economists Bryan Husted and José de Jesus Salazar considered three types of motivation that firms consider before investing in social activities:²

• Altruistic, where firms engage in a desired level of CSR without regard to maximizing their social profits
• Egoistic, where outside entities coerce firms into CSR through scrutinizing their social impact
• Strategic, where firms identify activities that consumers, employees or investors value and integrate them into their profit-maximizing objectives

The authors concluded that the potential benefits to both firms and society are greatest in the strategic case, when firms’ socially responsible activities are aligned with their self-interest.

Strategic CSR

Economists Donald Siegel and Donald Vitaliano studied the specific attributes of business and types of CSR activities that make it more likely that “socially responsible” actions actually contribute to profit maximization.³ They classified a large sample of publicly traded firms into several categories:

• Search goods, whose quality can be readily evaluated before purchase (such as clothing and footwear)
• Nondurable experience goods, whose quality is experienced over multiple uses and frequent purchases (such as food and health and beauty products)
• Durable experience goods, which must be consumed before their true value can be determined  and which require a longer period for the product’s characteristics to be fully known (such as cars and appliances)
• Experience and credence services, which have values difficult to assess even over long periods (such as auto repairs and weight-loss programs)

Siegel and Vitaliano found, using an aggregate measure of CSR involvement, that firms selling experience goods and experience and credence services are more likely to engage in CSR than those selling search goods. The difference in the intensity of CSR involvement across types of goods, they argued, is explained by consumers’ perception of firm involvement in CSR (even when products do not directly include a social component) as a valuable signal of reliability and commitment to quality and honesty.

In the Regional Economist article, Hernández-Murillo and Martinek concluded, “Modern theoretical and empirical analyses indicate that firms can strategically engage in socially responsible activities to increase private profits. Given that the firm’s stakeholders may value the firm’s social efforts, the firm can obtain additional benefits from these activities.”

Notes and References

¹ KPMG, The KPMG Survey of Corporate Responsibility Reporting 2013, December 2013. See http://www.kpmg.com/global/en/issuesandinsights/articlespublications/corporate-responsibility/pages/default.aspx.

² Husted, Bryan W.; and Salazar, José de Jesus. “Taking Friedman Seriously: Maximizing Profits and Social Performance.” Journal of Management Studies, January 2006, Vol. 43, No. 1, pp. 75-91.

³ Siegel, Donald S.; and Vitaliano, Donald F. “An Empirical Analysis of the Strategic Use of Corporate Social Responsibility.” Journal of Economics and Management Strategy, Fall 2007, Vol. 16, No. 3, pp. 773-92.

Additional Resources

• Regional Economist: Corporate Social Responsibility Can Be Profitable
• On the Economy: The Differences between House Price Indexes
• On the Economy: Are Wages and the Unemployment Rate Correlated?