Most people agree that Corporate Social Responsibility (CSR) is an important aspect in the management of firms. CSR is a commitment by firms to contribute to sustainable economic development by improving the lives of the community and the environment they are working within. Today, studies are engaged in finding the link between CSR and the economic performance of firms. These studies have largely shown that there is no substantial agreement about the link between CSR and the economic performance of firms.
Conflicting Perspectives
There are divergent views concerning the link between the socially responsible initiatives of firms and their financial performance. One view is that businesses are morally obligated to improve the lives of society and their stakeholders. According to this perspective, the "returns on investment" are measured by the society's overall well being and how well the stakeholders benefit from CSR initiatives. A second view is that businesses have a social responsibility to maximize profits. In this case, if the cost of CSR initiatives is disproportionately higher than the profit the firm is making, then CSR will negatively impact the firm's economic performance.
Evaluating Economic Performance
Managers are concerned with making profits for their company. In measuring the impact of CSR on their businesses, they have traditionally done so by looking at profit and loss accounts, the balance sheet and the cash flow statement. But broad-based evaluation methods such as the "stakeholder approach" are proving to be useful. For example, by offering customers good value products and good after sale services, they should return to the business again in the future. This socially responsible behavior may improve the economic performance of the firm.
Effects on Profitability
Research indicates that it is not in the interest of businesses to carry out the same CSR initiatives. Instead, firms should carry out CSR initiatives that are profitable and in line with their own business strategy, in order to become more competitive. In the long term, competitive business practices, complimented by equally competitive CSR initiatives will generate profits. The link between CSR and profitability is more evident in the long-term, rather than in immediate returns to shareholders.
Small, Medium and Big Companies
The relationship between CSR and its size also affects a firm's economic performance. It is recognized that small and medium firms cannot be expected to contribute as much as larger companies. Critics argue that for small and medium firms, spending money on CSR initiatives may have a negative impact on the firm's economic performance. These companies will have less money to reinvest in the growth of their own firm and may risk losing market share. Therefore, companies should spend on CSR only if it will enhance their economic performance.
