The Shareholder Value Case for Corporate Responsibility
Tuesday, August 31, 2010
POSTED BY D. N. Aust
Aneel Karnani’s “Case Against Corporate Social Responsibility” (Wall Street Journal, 10/23/2010) misses a critical dimension of this issue. When it comes to measuring shareholder value, conventional financial metrics such as earnings and NPV fall short, failing to incorporate factors such as public perceptions, risk profiles, and investor preferences, which can have a significant impact on stock prices and the returns shareholders actually realize.
For example, the UN Principles for Responsible Investing reports that its members manage $18 trillion of assets in 36 countries, with some estimates ranging as high as $27 trillion managed globally according to these principles. Values and philosophy aside, these are serious numbers which are already impacting stock prices.
Companies whose negative CSR reputation renders them off-limits to a significant number of institutional investors risk lower stock prices due to diminished access to market capital. Conversely, companies which are attractive using such criteria may well trade at a premium, reflecting enhanced demand among influential investor groups. Conventional financial metrics lack the ability to capture this important dynamic. Measuring this effect and incorporating it into the financial analysis provides a more complete and accurate picture of shareholder value creation, giving firms a better tool to differentiate between value-creating initiatives that are shortchanged by conventional analysis vs. “feel good” projects that sound appealing but ultimately detract from shareholder value.
So instead of falling for a CSR “illusion” as Professor Karnani suggests, at least some of the firms pursing sustainable/responsible strategies may actually understand shareholder value creation extremely well.