I am a postgraduate student carrying out a thesis on the below. As part of my research I am keen to hear views from those within the financial world regarding this topic.

If you would like to get in touch please do so on ruperthart@gmail.com.  

This is very much a work in progress and shall be developed over the next 4 months.

Working Title:

Does the market value Corporate Social Responsibility (CSR)? A case study of the affects of firm x's environmental practices on its share price.

Introduction

Climate change is high on the agenda with recent global developments and meetings in Copenhagen by the G20. The growing nature and importance of social, ethical and environmental responsibilities specifically in light of the recent BP Gulf of Mexico spill. What the BP spill has helped highlight is the importance of a company’s image and brand in the eyes of investors and how this can affect its share price (Diagram 1.1) and ultimately its market value. This is what can set it apart not only from its industry peers but also those other FTSE 100 companies that look for investment and whose market cap is so dependent on such investment.

It is becoming more important for companies to act responsibly in the eyes of the environment which Staib (2009) counts as a stakeholder in modern times (Wahba 2008).

‘The World Business Council for sustainable development acknowledges that for business’ to stay in business they need to address and respond positively to this and other environmental and social issues facing the World’ (Staib 2009, p1)

However, stock market indices and, especially, individual company share prices and dividends are an indication of profitability, not only to other companies, but to would be investors and shareholders. It is this interrelationship between a company’s `financial performance (as indicated by its returns in the form of share price and dividends) and shareholders’ willingness to invest or divest in the face of CSR that will form the core to this paper. As Rappaport (1998, p.14) states: ‘providing maximum returns for shareholders...fundamental objective of the business corporation’ this point is again discussed by Palmer et al. (1995) who state that business will not tend to sacrifice profit for the environment. The relationship between profit and environmental responsibility (Wahba 2008) is one of much debate within the literature. The question of whether this can be achieved within my chosen context shall be critically evaluated.

Rappaport (1998, p.5) argues ‘the only social responsibility of business is to create shareholder value and do so legally and with integrity’. This will be explored at some length examining the role of CSR in delivering value.

This paper will highlight through corporate social responsibility (CSR) the systems and means available to companies to incorporate green initiatives and the financial implications associated with this. Does CSR provide a motivation for investors to purchase shares? Does it deliver value in the form of higher share price and increased dividend yield? Is there a correlation between good practise CSR and growth?

There are now several means by which large multinational companies can be judged in terms of their environmental performance and their ability to deliver goods and services in both a socially responsible and sustainable way. Such indices as the FTSE4GOOD and the DOW Jones Sustainability Index (DJSI) that judges the performance of the DOW Jones Industrial Index (DJII) against a number of environmental and social factors will allow for accurate assessment of green initiatives and the effects on share price/dividend and ultimately the returns for shareholders. The risk of not considering these factors in a company’s and therefore an investors thoughts can result in what we see in Diagram 1.1 after the BP oil spill.

Friedman (1970) stated ‘the social responsibility of business is to increase its profits’ as this suggests quite clearly that profit maximisation (Palmer et al. 1995) is what companies are morally obliged to do. It is perhaps government that is responsible through legislation and regulation to ensure this is done with the environment’s best interests (Aupperle et al., 1985). The role of government, its effects on companies to deliver shareholder returns will most likely have its own subheading. Do investors mind if there is poor CSR implementation but growth is strong or do they prefer to see strong CSR against weaker growth?

It will be important to review in detail the works of such authors as Sparks (2002) as well as Sullivan & Mackenzie (2006) who all discuss shareholder activism.

Wahba (2008:p.90) argues that ‘to date theories are inconclusive and empirical evidence is mixed’ when ascertaining the relationship between corporate environmental responsibility and firm market value. As Staib (2009) argues the central economic assumption is that investors will act in their own interests. The issues of responsibility come down to government intervention and company attitudes. The shareholders actions are based on achieving profit. In this sense the implications of short term and long term shareholder views will be examined. Investors are aware of the costly effects of, as Staib’s (2009) example surmises, assisting developing countries in gaining access to medication by pharmaceutical companies in favour of corporate image when these goods could be sold to maximise profits.

Aside from the previously mentioned authors I will draw on a range of journal articles in which there is a wealth of case studies (Wahba 2008, Collison, Cobb, Power & Stevenson 2008), experimental studies (Pikhardsson & Holm 2008), and reviews (Wahba 2008, Stanny & Ely 2008, Edoho 2008) of the affects of CSR and environmental issues on the financial performance and indeed the reaction of investors to companies profitability and whether these issues of environmental stewardship are at the expense of the shareholder and whether it is a factor in their motivation to invest. I shall look to relate this back to Rolls Royce as my case study company.

The theory surrounding this research will be applied around stakeholder theory (Freeman, 1984; Wood, 1991) and competitive advantage (Waddock & Graves, 1997) Shrivasta (1995) argued that techniques and methods that minimised environmental impacts, reduced costs and/or enhanced sales were a tool of competitive advantage. However at what cost to the shareholder returns? This will be explored. There is a wealth of information and writing on strategic direction and management of business that incorporates going green initiatives and still maintains returns for investors (Majcomber & Marcus 2001, Porter 1991, Porter & van der Linde 1995a).

The idea that it ‘pays to go green’ (Staib 2009) is supported by several papers including Gladwin 1993, Hart 1995 and others. However, as this paper will explore competitive advantage and continued shareholder returns may not be applicable to all industries (Christmann 2000). Walley & Whitehead (1994) argue against the win on both sides of the environmental solution of competitive advantage yet maintain shareholder returns. Competitive advantages of strategic human resource management will also be discussed and evaluated in line with this subject. There is also a wealth of empirical study (Chen & Metcalf, 1980; Jaggi & Freedman, 1992) that supports Friedman’s (1970) agency theory in relation to a firm’s profitability and its social-environmental responsibilities (Wahba 2008). However, there is a further theory, the theory of the firm that supports the role of supply and demand. This theory looks to explain the relationship between those firms that spend money on CSR and those that don’t. Those that do not will counter their offerings through reduced prices for their products and services. Thus eliminating any potential gains from acting responsibly.

This research will look to address several objectives throughout the course of the paper some having already been touched on. Whilst an analysis of firm x will be important to applying practicality to the theories and models presented it is important to introduce the main academic theory that will be addressed here.

I will look to test the theory of stakeholder theory. At present the hypothesis is that shareholders are attracted to such firms as firm x for the express reason of obtaining capital appreciation and income streams (through dividend) regardless of whether there are positive CSR mechanisms in place. The overriding aim of investors and companies is to maximise profits as highlighted earlier (Friedman 1970; Palmer et al. 1995). CSR as a tool for competitive advantage will also be analysed. Does CSR, specifically mechanisms that address the environment offer competitive advantage to firms in the eyes of the stock market?

Tags: Environment CSR Corporate Social Responsibility Market Value Share Price