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Is Corporate Social Responsibility Stealing Money From Shareholders?

What qualifies as CSR? Is it considered stealing from shareholders instead of giving them back dividends? What activities should companies pursue?

CSR has been one of the topics of the hour lately, trying to encourage companies to participate into different community-development services. But what qualifies as CSR? Is it considered stealing money from shareholders instead of giving them back dividends to pursue good causes to their own liking? What activities should companies pursue?

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According to Wood in his paper “Corporate Social Performance Revisited” published in the Academy of Management Review in 1991, there are three levels of CSR work:

  1. The first level is institutional, based on a firm’s generic obligations as a business organization towards society like paying its taxes, respecting minimum salaries.
  2. The second level is organizational, assuming businesses are responsible for outcomes related to their areas of involvement with the society. Examples would be a chemical factory’s responsibility towards environmental concerns for polluting air and water.
  3. The third level being individual. based on managerial discretion, as managers would act as social actors deciding how to give back to society on different fronts not necessarily related to the core business of the firm.

The first two levels: the institutional and organizational ones are clear enough to be considered CSR while the third individual level is questionable. Some generic CSR work based on the decision of managers can be done as a part of marketing/PR campaigns. Another example would be companies donating money to certain government initiatives to maintain their external relations with the government, which in turn impacts their daily business. A third scenario could be a company manufacturing diapers promoting the healthier use of diapers and giving away free products to maternity hospitals to distribute to newborns. The paper by McWilliams and Siegel ” “Corporate Social Responsibility and Financial Performance: a theory of the firm perspective,” published in the Academy of Management Review in 2001 proposes some analysis to be done in order to measure the return that CSR activities produce, and how much to invest there to generate a decent return on investment like any other project.

But, doing extra social work not related to the firm’s operations without direct benefits for the company could be considered stealing from the shareholders.The main raison d’être for a company is to maximize its profit and distribute extra cash as dividends to shareholders, who in turn would give away to charities and good causes upon their discretion. This theory was advocated by Friedman in his paper “The Social Responsibility of a Business Is to Increase Its Profits.” Published in The New York Times Magazine in 1970. A large Multinational company planting trees in Cairo streets (not related to their business), or giving some money anonymously to charity (not related to its core operations) … where would that fall according to Friedman? Is it considered stealing?

Is it up to whim of managers to decide where the excess cash of shareholders should go? Becerra proposes in his book “Theory of the firm for strategic management” published by Cambridge University Press in 2009 to spend money generated by CSR back to CSR only. An example would be Starbucks selling a certain coffee format at a higher price than average for a CSR cause (over and above the normal profit for shareholders), and distribute this extra money for the good cause, which sounds very reasonable.

So how can a company optimize its CSR involvement? Companies could give away free services. Porter suggests in his paper “On Competition” published in 1998 by Harvard University Press, that every company should focus on its core competence to insure efficiency in giving to society. For example, McKinsey & Co should offer free consulting using the excess time of their consultants instead of giving away cash, or Walmart allowing the use of its distribution centers in an earthquake-struck city to distribute food. In that way companies help society with a little incremental effort and cost, focus on what they do best, and promote their core competence being put to use for a good cause.

Alaa is co-founder and managing director of Enmaa Financial Services, a boutique investment bank that started in Egypt mid 2007, and currently conducting transactions all over the MENA region through offices in Egypt and KSA. Alaa is currently undergoing his Doctorate of Business Administration, in the Instituto de Impresa (IE business school) in Spain.

About the author

Alaa is co-founder and managing director of Enmaa Financial Services, a boutique investment bank that started in Egypt mid 2007, and currently conducting transactions all over the MENA region through offices in Egypt and KSA, one of which was the sale of OrasInvest for 180M US$ in 2008. Alaa’s background spans manufacturing, sales and marketing, turnarounds, start-ups and general management.

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