An Investor’s Perspective on Corporate Social Responsibility (CSR)
There’s an old saying in investment finance. When a company builds a new headquarters with a fountain in front, it’s time to sell the stock.
Corporations usually go through certain stages. Startup, Growth, Maturity, and possibly Decline.
During the early stages of startup and growth, money is tight because the business is still being built. While low on funds, the company is usually overflowing with ambition and optimism. The firm is expanding and investing, trying to conquer new markets. Hiring new staff and developing new products keeps it busy. This early ambitious stage is probably the best time to invest in the business.
Once the company succeeds it’s growth stages, it enters maturity. By now profits are rolling in, and the firm finally has cash in the bank. Smart companies try to maintain the diligence and ambition that drove them to success. However, many fall into the trap of decadence and profligacy. This is where the new headquarters with a fountain in front comes in. Instead of continued entrepreneurial action, the managers want to enjoy the success and show off a little. They acquire new headquarters, corporate jets, art collections, and of course, CSR programs.
Senior management finally has the money to indulge in Picasso and Rothko. The CEO or spouse may have a favored charity or cause. If this was indulged in using personal funds, it would be justifiable. Mostly however, this is expensed through the business. Shareholder’s profits are spent on the opulent lifestyle of the business class. CSR programs fit squarely in this philanthropic indulgence. CEOs want to show that they and their firms are successful. What better way than to fund an orchestra, fight cancer or save Africa. Using the company’s funds of course.
This should send a message to investors. If a business has millions to spend on unrelated philanthropy, they don’t have ideas for profitable expansion. A firm without opportunities to expand is a firm about to decline.
Are CSR Programs a sign of Ethics?
Some investors believe that CSR programs imply ethical behaviour. A firm with a heart must be a good investment. This displays an ignorance of recent history. Some of the biggest corporate failures, such as Enron and BP, won awards for their great CSR.
Many CSR programs are simply smoke and mirrors. Deceptions designed to appeal to consumers and appease critics. A firm with deceptive CSR may have deceptive accounting. It is an open secret in business circles that CSR is simply fancy marketing using social causes. Since there are no objective standards or accountability with CSR, CSR fraud is quite common. Investors should note that CSR fraud is a good sign that the company has other fraudulent practices.
In addition to its duplicitous and dishonest nature, CSR sends important messages to investors. That management uses social and environmental problems as advertising. That management is spending the firm’s profits on their personal interests and concerns. And that management doesn’t have profitable ideas and opportunities to invest in. A firm with CSR may have management that is decadent, profligate and possibly fraudulent.
CSR & Risky Companies
CSR was pioneered by oil & tobacco companies. It’s also no coincidence the biggest spenders in the CSR field are banks, energy firms, tobacco, etc. Heavily criticized firms use CSR as a PR defence and to whitewash & greenwash their industries.
CSR is therefore a useful gauge in how risky a corporation is. These firms are at the mercy of public opinion and government officials looking for scapegoats.
Honest and straightforward firms don’t need the window dressing of CSR.