Corporate Social Responsibility and its impact on shareholder’s wealth

This article discusses the concept of Corporate Social Responsibility (CSR) and its impact on shareholder's wealth. It explains how CSR is a tool to aid the mission of the company and to guide the company as to what stands for its customers. The article also discusses the differing views on CSR and how it can positively contribute to the wealth of the shareholders of the company. It also highlights the importance of maintaining a proper balance between the basic objective of shareholder’s wealth maximisation and its obligations towards the society to which they belong.

Running Head: Corporate Social Responsibility
Corporate Social Responsibility

Corporate Social Responsibility 1
Corporate Social Responsibility and its impact on shareholder’s wealth
Every business organisation use the resources of the society in which it operates. Therefore, it
has some responsibilities towards such society and environment, to fulfil in order to survive
and grow smoothly. The concept of corporate social responsibility is not new and is in
existence since late 1960s and early 1970s after the concept of stakeholder’s management
was adopted by the large multinational corporations. Stakeholders are the parties which are
influenced by the activities and performance of the company. In the recent times, the concept
of CSR has grabbed huge attention of the regulatory bodies. Though, consideration of CSR
has its positive sides for the firm but still it is said to have some negative side in context of
corporate objective of wealth maximisation. There could be a wide range of reasons due to
which firms undertake CSR initiatives in the course of their business which are discussed in
the further section.
Corporate social responsibility is a concept that is applied by the companies in order to
produce a positive impact on the society and environment in which they are operating their
business. CSR is considered as the tool to aid the mission of the company and to guide the
company as to what stands for its customers. ISO 26000 is an internationally recognised
standard for the CSR (Carroll, 2015). It is generally regarded as the tool to balance the socio-
economic and environmental imperatives of the business and the stakeholder’s expectation
from the company. CSR is not merely a philanthropy exercise which covers the act of charity
but it is the concept which is quite broader than mere charity (Prasad, Sharada & Kumar,
2001). Corporate social responsibility is typically referred to the integration of social welfare
programs into the business models and the culture of the companies. CSR is generally
regarded as one of the key management concept. Nowadays, it is used as a business approach
to contribute positively and effectively to the sustainable development of the environment
through the delivery of economic, social as well as environmental benefits to all the
stakeholders of the entities. There is no particular definition of the concept of CSR and also
there is no specific set of activities which are constituted as the CSR initiatives (Cadbury,
2006.
In context of CSR, two differing views are generally proposed. Firstly, the shareholder’s
wealth maximisation view and the second is the shareholder’s expense view. As per the first
view i.e. the shareholder’s wealth maximisation, it is generally observed that the CSR
activities positively contribute to the wealth of the shareholders. While performing the CSR

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activities, the firms focus on protecting the interests of the other stakeholders of the firm and
this enhances the willingness of such stakeholders to support the operations and activities of
that firm. When firm operates efficiently, it is able to generate more returns which ultimately
increase the wealth of the shareholders of the company. The wealth maximisation of the
shareholders of the company is considered as one of the main objectives of business as
shareholders constitutes to be the major most stakeholders of the company and regarded as its
financial catalyst. The shareholders of the company are entitled to the share in the profits of
the company by way of dividend in return of their investment in the company. As they invest
their surplus funds for the economic growth and development of the company, they expect
maximum returns from the company. The firms that are highly focused on performing the
CSR activities are found to have stronger reputation which satisfies large base of its
stakeholders. For the finance providers of the company, annual reports forms the most basic
document to assess the financial health of the firm which is seeking funds. It enables them to
learn about the financial as well as non-financial performance of the business. In today’s
world, the financial institutions and banking corporations are more inclined towards the
companies that have a good sense of their social responsibilities. Even The integrated reports
of the company contain the information regarding the CSR initiatives taken up by the
company during a particular period of time (Tai & Chuang, 2014). Moreover often it is seen
that many financial institutions set out CSR initiatives on part of the client as the mandatory
condition to meet the eligibility criteria for the financial assistance. Further, the employees
who perform their functions for the company which is socially responsible, automatically
gains more respect and trust for their employing organisation as they find themselves secured
in such organisation where human rights, employees health and safety and other such factors
are given due importance and value. The employees feel motivated and tend to sustain for
longer term in such companies. Moreover, the adherence to the CSR principles allows the
company to builds sound public image of the company and hence it helps in creating sound
goodwill for the firm for the longer term (Lindgreen & Swaen, 2010). The fulfilment of CSR
objectives safeguards the company from any legal or regulatory actions against the company.
Further, the entity that performs its functions in the socially responsible manner is supported
more by the society in various manners as the CSR initiatives of any firm reflects the degree
of respect and value it has for the host society. Therefore, the CSR initiatives of the company
positively contribute to attract new and satisfy the existing stakeholders of the company
(Matten & Moon, 2008).

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Therefore, on the one side, an entity’s CSR policy works as a means of increasing its overall
profitability of the business in long run as it creates trust about the business in the eyes of
society and builds confidence of various other stakeholders of the company especially the
customers (Garriga & Melé, 2004). The entities that perform their business functions in the
most socially responsible way are generally found to be more attractive to the potential
customers and investors in the market. Therefore, CSR helps in creation of wide customer-
base for the company which ultimately leads to high profitability of its business (McWilliams
& Siegel, 2001). When a firm is able to generate higher profits, it is more able to maximise
the wealth of its shareholders by offering them higher returns by way of dividend.
From the real world, the case of Unilever sets a classic example of incentives of CSR
initiatives. The company is a large multinational corporation and hence it has a large number
of stakeholders (Thompson, 2017). Through the adoption of CSR strategy, Unilever has been
consistently ranked as the ‘Food Industry Leader’ in Dow Jones Sustainability World Indexes
since last 11 continuous years. Also, it has been ranked at 7th position among the top 100
companies that are sustainable across the globe. One of the major initiatives that contributed
to its leadership is the sustainable tea programme which is its key part of its CSR policy
(Unilever, 2017). The CSR initiatives of Unilever have allowed the company to achieve
strong financial position in terms of profitability and thereby enabled it to maximise the
wealth of its shareholders.
Though, it is generally found that CSR initiatives brings various advantages to the company
but on the other side, it is also argued by the critics of CSR that such activities diverts the
focus of business managers from their core business activities which are necessary for the
generation of revenue for it. The shareholders expense view supports the fact that managers
of the entities engage themselves in the performance of CSR activities to satisfy other
stakeholders at the cost of its shareholders (Deng, Kang, & Low, 2013). Companies divert
some proportions of their annual operating profits in CSR activities such as providing
employment opportunities to the people who belong who are below poverty line at
considerable wage compensations, providing free or nominally charged health care facilities
to the average sections of the society, providing education facilities to the weaker sections of
the society, arranging food campaigns for such sections of the society, promoting plantations
and waste management activities and other environment friendly activities etc.

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For instance, if a company adopts the stringent standards in relation to pollution control, the
rigidity of these standards can put the company at a competitive disadvantageous position
because these standards will force the company to spend more of their economic resources on
the activities that are non-productive for the business. These activities in turn lead to reducing
the overall profitability of the firm and ultimately it impedes the wealth of the shareholders of
the company.
Therefore, it is important for the companies to maintain a proper balance between its basic
objective of shareholder’s wealth maximisation and its obligations towards the society to
which they belong. It must ensure that each of the aspect is given due importance and none of
them is significantly affected because of laying excessive focus on the other objective. It
must be ensured that the companies clearly understand their responsibility towards the society
from which it seeks various resources to operate this business the shareholders who invest
their huge sums of money in the company to finance its daily operations and assets that are
required to carry out the business. Only a proper trade-off between the CSR and
shareholder’s wealth maximisation objective can lead to a successful business of an entity.

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21.
Carroll, A.B., 2015. Corporate social responsibility. Organizational dynamics, 44(2), pp.87-
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Deng, X., Kang, J.K. and Low, B.S., 2013. Corporate social responsibility and stakeholder
value maximization: Evidence from mergers. Journal of financial Economics, 110(1), pp.87-
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Garriga, E. and Melé, D., 2004. Corporate social responsibility theories: Mapping the
territory. Journal of business ethics, 53(1-2), pp.51-71.
Lindgreen, A. and Swaen, V., 2010. Corporate social responsibility. International Journal of
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Matten, D. and Moon, J., 2004. Corporate social responsibility. Journal of business
Ethics, 54(4), pp.323-337.
Matten, D. and Moon, J., 2008. “Implicit” and “explicit” CSR: A conceptual framework for a
comparative understanding of corporate social responsibility. Academy of management
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McWilliams, A. and Siegel, D., 2001. Corporate social responsibility: A theory of the firm
perspective. Academy of management review, 26(1), pp.117-127.
Prasad, C.A.I.S., Sharada, C.S.S.C. and Kumar, C.A.S., 2001. Corporate social responsibility.
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http://panmore.com/unilever-corporate-social-responsibility-stakeholders. Accessed on:
31.08.2018.

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https://www.hul.co.in/Images/hul-annual-report-2017-18_tcm1255-523195_en.pdf Accessed
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