Could “Doing Good” Be Bad for Your Business?

Chad Brooks

While it might be good for society, corporate social responsibility (CSR) isn’t necessarily good for your bottom line, new research suggests.

A study recently published in the Journal of Corporate Finance found that companies that spend time developing and implementing socially responsible programs lose focus on projects that can make money.

“If I’m a CEO, I should be focusing on finding growth opportunities,” said David Javakhadze, one of the study’s authors and an assistant professor at the Florida Atlantic University College of Business, in a statement. “If instead I spend my time and my energy to find CSR initiatives, it diverts my time and my energy to something else, not focusing on building shareholder wealth.”

For the study, researchers defined CSR as strategies to foster some social good, including programs that benefit community engagement, diversity, the environment, human rights and employee relations. They came to their conclusions after analyzing a large sample of organizations between 1992 and 2014.

The study’s authors found that focusing on CSR strategies hurts companies financially because they aren’t devoting all their attention to investment opportunities. In the long run, this lack of focus on increasing profits leads to losses for company shareholders.

“We found that emphasizing corporate social responsibility is not good for shareholders,” Javakhadze said. “If you're an investor, you should think twice before you invest in those firms that emphasize CSR.”

The study’s authors said social responsibility reduces a firm’s overall performance and investment efficiency. Javakhadze said investment typically follows growth opportunities. However, trying to institute social good changes this relationship because it averts a firm’s resources from its core task of increasing profits.

Javakhadze said the bottom line isn’t hurt just because money is being invested in CSR initiatives; it’s also negatively impacted by the time companies spend on these programs.

The research found that the impact of CSR on a company’s bottom line is less for organizations that are rich in resources. However, most businesses don’t have that luxury, according to Javakhadze.

“If you invest in socially responsible activities, then you won’t have enough resources to invest in more profitable projects, which is not good,” he said. “It might be good for society. It might be good for managers. But it is not good for shareholders.”

The study was co-authored by Avishek Bhandari, a doctoral student at Florida Atlantic University.