Corporate social responsibility as a conflict between shareholders

An increase in CSR expenditure may be consistent with firm value maximisation if it is a response to changes in stakeholders’ preferences. However, the authors of this paper argue that a firm’s insiders may seek to over-invest in CSR for their private benefit to the extent that doing so improves their reputations as good global citizens.

The authors test this hypothesis by investigating the relation between firms’ CSR ratings and their ownership and capital structures.

Employing a unique data set that categorises the largest 3,000 U.S. corporations as either socially responsible or socially irresponsible, the authors find that on average, insiders’ ownership and leverage are negatively related to the firm’s social rating, while institutional ownership is uncorrelated with it. These results support the hypothesis that insiders induce firms to over-invest in CSR when they bear little of the cost of doing so.

CSR can thus create a conflict between different shareholders. In this conflict, insiders personally benefit from the fact that they are associated with firms that have a high CSR rating. The conflict is mitigated if insiders hold a large fraction of the firm. Similarly, debt serves as a conflict-mitigating mechanism.

The CSR conflict can be viewed from two different normative perspectives.

• first, at the chosen level of CSR expenditure is greater than that which maximises firm value. This typically has a negative connotation as it decreases shareholder value
• second, the CSR conflict leads to the promotion of a social agenda that can be viewed in a positive way

Given most agency conflicts are interpreted as managers demonstrating self-serving behavior at the expense of other shareholders, it is somewhat surprising to show that the CSR conflict generates greater alignment of corporate and social goals.

From a social welfare perspective, whether this conflict increases total welfare depends on whether firms have a relative advantage in contributing to society’s benefit.