The Impact of Corporate Social Responsibility

Nassim Nicholas Taleb’s now famous book ‘The Black Swan: The Impact of the Highly Improbable’ focuses on the extreme impact of certain kinds of rare and unpredictable events, and humans' tendency to find simplistic explanations for these events retrospectively. The main idea in Taleb's book is not to attempt to predict black swan events but to build robustness to address negative ones that occur, and exploit positive ones. He suggests that hindsight bias and availability bias bear primary responsibility for our failure to guard against black swans, and by way of example asks us to consider a financial instrument that earns $10 with 98% probability, but loses $1000 with 2% probability; it’s a poor net risk, but it looks like a steady winner. Taleb gives the example of a trader whose strategy worked for six years without a single bad quarter, yielding close to $80 millionth- then lost $300 million in a single catastrophe.

In 2006, the Guardian newspaper and others reported that the world’s largest pension fund, managed by the Norwegian government, was boycotting the, then, world's largest retailer for alleged "serious and systematic" abuses of human and employment rights in its supply chain. The Norwegian government stated that its $240bn oil fund would no longer invest in the retailer and that it had sold its holdings worth about $430m. That company's share price dropped by 0.5%, and since then a clutch of major investors have also abandoned that business, all citing labor and human rights as their driving concern.

That experience is not an isolated one. A study conducted by the Sloan School of Management at MIT found a correlation between stock performance and corporate social responsibility (CSR) in firms over a three-decade period from 1980 to 2009. The study examined the impact of positive and negative events on companies' stock performance. Following an eco-positive event, a company's stock typically rose an average of 0.84 percent in the next two days, while eco-negative events caused stock prices to drop an average of 0.65 percent. The impact of eco-negative events caused a greater decline with each passing decade- 0.42% in the 1980s, 0.66% in the 1990s and 1.12% in the 2000s, showing that investors are becoming more aware of the importance of CSR. Another study, conducted by the Ethical Investment Research Service, found that ethics-related news influences a company's share price for better or worse, revealing effects of between 0.5% and 3% of share price.

The court of public opinion can be a harsh one. Numerous polls over the years have highlighted the fact that consumers, and the public at large, are very concerned about social and environmental issues- Gallup quotes an average of 55% of those questioned over the past 10 years. Failure to understand public opinion can be disastrous- recently, the Guardian newspaper reports that car sales at Volkswagen have dropped 10% since the 2015 emissions rigging scandal. Professor of Finance Hoje Jo of the Leavey School of Business, along with colleagues at Stanford and Pepperdine, analysed data from 3,000 companies during an eight-year period and set out the findings in a paper titled “The Economics and Politics of Corporate Social Performance”. Jo compared companies’ financial performance with their social performance, and took into account social pressures on firms from nongovernment organizations and activists.

“Social pressure could have a direct effect on the financial performance of a firm if it causes consumers, investors, or employees to shun the firm. Social pressure could also damage the reputation of the firm or a brand, and it could portend future problems arising from private or public politics.”

Organisations that effectively engage in tackling human rights abuse in extended supply chains are not practicing ‘philanthropy’- they’re practicing good business. 


-          Chris McCann