OPINION LEADERS Do Ethics Mean Earnings?

Do socially responsible companies make more money? We like to think they do. We like to think accountability impacts on the bottom line, that consumers warm towards companies that take an ethical stand on their communities, their environment, their planet and the way they do business. And as managers, particularly those in publicly listed companies, consider their “shareholder wealth maximisation” role within their organisations, they surely must want to better understand the relationship between matters of the heart and matters of money.
Enron’s downfall (amongst many others) triggered wave of support for corporate social responsibility (CSR) across the world. This trend – highlighted by large corporate outpouring of support for victims of the recent tsunami – has drawn criticism from proponents of “the business of business is business” school of thought (such as embraced by The Economist magazine).
They suggest that shareholders pool their funds into business for the sake of expected financial returns, and that managers’ responsibilities are to act in the best interests of shareholders. Any “matters of the heart” should come from the shareholders themselves, not from the corporation. Yet increasing numbers of businesses are taking matters of the heart seriously enough to report on them. What is going on?
In part it’s response to string of corporate governance failings – think of the spectacular collapse of Access Brokerage last year. “More transparency” has become the standard economic “solution” to such problems. For example, to strengthen corporate governance, the New Zealand Stock Exchange has proposed setting minimum number of independent directors on boards of listed companies. But do more independent directors make CSR matters more transparent? And if so, what is the effect on profits?
Trawling through the annual reports of New Zealand stock-exchange listed firms between 2000 and 2003, number of interesting trends emerge. First, it is true that having more independent directors means more pages of triple bottom line reporting. The correlation is not strong, but it’s there. So on the first count, we can say that yes, there does seem to be more transparency. At least, there are more pages to read about CSR-related matters.
But we could not find any statistically significant link between triple bottom line reporting and profitability. That is, there’s no evidence that firms embracing CSR make more – or less – money than anyone else.
This may be good news for those Economist readers who believe that CSR is simply an excuse for handing out shareholders’ money without their say-so. But there’s another way to look at the data. CSR doesn’t appear to make firms more profitable but neither does it make them less profitable. So while there’s no compelling reason (profit wise) to adopt triple bottom line reporting; there’s also no compelling reason not to. Moreover, not losing money is good thing, and often difficult task in changing environment.
Looking at that company report data again, there’s contrast between bigger firms and smaller ones. Operations with triple bottom line reporting tend be larger, with assets in excess of $500 million. Big companies have reputations to maintain, they’re more visible and they have bigger impact on their community, so for them it seems clear that more transparency (or rather, reporting) is appropriate.
But this doesn’t mean that smaller companies are out to fleece their customers and shareholders, and wreck the environment. Small and medium-sized enterprises (SMEs) are well known as businesses that put their connected values with employees, customers and suppliers high on their priority list, yet they do not formally report on the nature or the value of these networks and relationships.
There’s very real possibility that the connected values which have been long evident in the SME sector are now emerging, with heart, in the publicly listed arena. The signs all point to the increasing likelihood that consumers will continue to care about social responsibility without necessarily expecting to have to pay more for the expectation. It may well become the normal way of doing business. After all, managers feel and share the values of their stakeholders (including shareholders) as they engage in CSR activity, since they are human too.
The good news is that CSR activity seems here to stay. Businesses have begun to understand that they can think with their hearts as well as their wallets without any damage to shareholders. Recent science has begun to show that by leading with your heart, you add to the sum total of happiness. What an attractive goal for business and society.

Ed Vos is professor of finance at Waikato Management School.
Email: [email protected]

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