Assessing the Rate of Return of the Adoption of Corporate Social Responsibility Initiatives

Abstract

The thesis investigates the relationship between corporate social responsibility (CSR) and financial performance. The thesis is organised into three parts. The first part, the literature review, is in three sections, the first section provides an introduction to the field of corporate social responsibility, its grounding in economic theory and its historical background. The second part of the literature review covers the social and environmental issues relevant specifically to the food and agriculture sector. The third section is a systematic review of the studies that examine the relationship between corporate social performance and financial performance. This review was carried out using a modified Cochrane systematic review method, more commonly found in the medical literature than in the economics literature. The results showed that 70% of the studies reviewed showed a positive and statistically significant relationship between CSR and financial performance. The second part of the thesis includes three empirical studies. The first study, an event study, assessed the impact of the FTSE4Good Index on firm price. The study examined the return to companies of being included in a modified share index that signals good performance in terms of CSR. The results of this event study showed that companies are not rewarded for being included in the index and are not penalised for being deleted from it. The second empirical study, a probit analysis, aimed to identify the probability of a company passing a social and environmental screen given information about the company’s size, financial performance and sector. Results showed that companies with small market capitalisation, low income gearing and high net profit margins were more likely to pass the screen than other companies. Companies in the energy sector were less likely to pass than other companies, and financial sector companies more likely to pass. The third empirical chapter assessed the effect on the financial performance of companies of passing a socially responsible investment screen. The results showed that there was a relationship between passing the screen and higher earnings per share, but the relationship between passing the screen and other financial indicators was not proven. These studies demonstrated the difficulties that exist to provide statistically strong evidence for the relationship between corporate social responsibility and financial performance. Thus the third part of the thesis moved into a different area, from the supply to the demand side. This is the valuation of non-financial indicators and their relationship with CSR, this included a discursive chapter on intangibles and their relationship with CSR and a final empirical study: a choice experiment. This study demonstrated that MBA students take nonfinancial and ethical issues into account when making investment decisions. In conclusion, providing strong evidence for the relationship between corporate social responsibility and financial performance is difficult. There are many ways of measuring CSR and many ways of measuring financial performance. Depending on the measures used, different results are obtained. Looking beyond conventional financial performance measurements, to intangibles, provides a more holistic picture of what is going on in the relationship and shows that there is more to company valuation and investment decision making than financial performance indicators. CSR is an important component of company reputation and has an intrinsic value that is difficult to measure but is no doubt very high.