As business has evolved throughout time, so too has its dynamic role and purpose within society. Whether it be the gradual conversion to a largely employee-focused company culture, or the expansion of protective regulations concerning environmental sustainability, business has inarguably seen a drastic transformation in contrast to the times of unregulated employee work conditions and widespread industrial pollution. The catalyst for this change is largely apportioned to the shifting demand and expectations brought forth by an increasingly value-based consumer market.
In order to meet consumer expectations, business began its shift towards standardized accountability. In modern times, meeting the standards set by governing bodies is insufficient in influencing consumer decisions. To go above and beyond the standard, to be progressive in showing gratitude to the communities and employees that have fostered an organization, is true corporate social responsibility. Without this vision, this purpose to contribute to society, executives like Larry Fink argue that no company can truly reach its full financial and operational potential (Horst).
The Role of CSR in Financial Management
Steadily, financial managers have begun to realize the importance of CSR in their respective organizations’ success. In BlackRock CEO Larry Fink’s annual letter to corporate CEOs, Fink highlights the importance of CSR in relating the concept directly to optimal corporate financial performance and long-term growth. Fink then exemplifies the concept using his own company by revealing a new model of shareholder engagement for BlackRock, which includes the strengthening and deepening of shareholder-company communication and engagement. Fink believes this is necessary in order to move shareholder and financial manager focus back to long-term value creation, largely through investments in CSR (Fink).
For companies lacking suitable CSR, Fink highlights criteria such as environmental impact, workplace diversity, community engagement, and employee re-training as some of the larger concerns that companies must confront. In engaging in this social purpose, firms are able to develop long-lasting, profound customer and employee relationships, which ultimately lead to better organizational performance (Horst). Fink’s letter is a testament as to why true corporate success isn’t measured in short-term profits, but in long-term value and societal impact.
Challenges in Recognizing the Value of CSR
Many financial managers still overlook the significance of CSR investments as a consequence of CSR’s value not being immediately apparent in the defined goals of financial managers. For example, Westerfield, Ross, and Jordan define the goal of a financial manager as maximizing the current value per share of a company’s current stock. As such, in representing stakeholder’s interests, the job of a firm’s financial manager is to analyze and determine which investments, management systems, and financing decisions must be made in order to best increase the corporation’s stock value. At first glance, it doesn’t seem as though CSR has a place in these responsibilities.
After all, there are no immediate monetary rewards, and shareholders desire profits, not idealistic acts of goodwill. Well, this is where the problem lies, in the short-sighted focus embedded into the minds of financial managers and their shareholders. In order to see the significance of CSR, executives must take the wider interest of stakeholders into consideration, rather than focusing on what they assume to be in the immediate interest of the shareholders. Furthermore, there are studies which show the significance CSR can have in both short-term and long-term objectives, as well as in a company’s strategic competitiveness.
Empirical Evidence Supporting CSR
The Reputations Institute found that a mere 17% of consumers would recommend a firm regardless of its CSR performance, while 73% of consumers stated they would definitely recommend companies based on an excellent CSR reputation. Data has also shown that companies who invest in CSR develop an ingrained advantage in sustaining above-average profit over time. These studies help to prove the existence of a positive relationship between reputation and financial performance, and further exemplify the inherent value in CSR for financial managers (Kolisch).
Case Study: Delta Airlines and CSR
As of February 24th, 2018, Delta Airlines announced that it would be ending its flight discount for members of the National Rifle Association, following the Parkland shooting on February 14th. Although only 13 NRA members had ever used the discount, the announcement caused a political uproar in Georgia, and Republican lawmakers punished the company by repealing a budget provision that included a $50 million airline fuel tax exemption. Had it not been for the repeal, Delta would have been saving roughly $40 million in tax breaks (Horton).
While CSR has many benefits, perhaps this situation will make corporations wary of engaging in CSR investments that involve politically divisive topics. Surprisingly enough, Delta’s stock price rose after the announcement and has remained on a trend of growth ever since. This example highlights that, while CSR can sometimes lead to short-term financial setbacks or political backlash, it can also enhance a company’s reputation and long-term financial performance.
Conclusion
As business continues to evolve, the role of CSR in shaping corporate strategies and influencing financial performance becomes increasingly important. Companies must recognize that CSR is not just a peripheral activity but a core component of long-term value creation. By aligning their operations with societal values and stakeholder expectations, businesses can foster trust, loyalty, and sustainable growth.
Financial managers and executives must broaden their focus beyond short-term profits to consider the broader impacts of their decisions on society and the environment. Empirical evidence and case studies demonstrate that CSR can enhance a company’s reputation, attract customers, and improve financial performance. Therefore, integrating CSR into the strategic framework of a business is not only ethically sound but also a prudent financial decision.