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NEW YORK—When government forces the business sector to “do good,” it hurts the bottom line and actually reduces voluntary efforts to be good corporate neighbors. Those are the findings of research unveiled today by Columbia Business School, which examines the viability of mandatory Corporate Social Responsibility (CSR) as a business practice, finding that enforced activity –efforts by governments to make CSR spending mandatory by law– is a value-decreasing proposition for shareholders, and a disincentive for corporate good behavior. Two new studies, led by Professor Shivaram Rajgopal, arrived at this conclusion after analyzing a 2014 mandate, enforced by the Government of India, requiring Indian businesses to spend two percent of their net profit on CSR initiatives.
“Our findings prove that CSR is counterproductive when governments get involved,” said Columbia Business School Professor Rajgopal. “In developing an effective method for measuring CSR’s impact on business we were able to prove that CSR only has value if it is a voluntary activity. Shareholder value decreases as mandatory CSR increases. In fact, mandatory CSR is, in effect, nothing more than an inefficient backdoor tax on private sector.”
Over the last decade, while CSR has evolved into a massive industry and a fundamental, strategic priority for national and global businesses, governments have begun expoloring regulatory intervention to mandate these efforts.
In his first study, “Does Corporate Social Responsibility (CSR) Create Shareholder Value?” Rajgopal isolated eight dates for which CSR provisions were enforced. He then compared the stock prices of firms affected by India’s CSR mandate to similar firms unaffected by the law. The resulting difference in stock returns for these firms was inextricably linked to the value loss imposed by the new CSR mandate. Using this approach, the study found that firms affected by the law lost an average of 4.1 percent of their stock market capitalization on those eight dates.
The study found increased drops in shareholder value to be a direct result of forced managerial attention and incurred expenses on reporting systems, governance processes and compliance costs to administer the mandatory CSR activities. The study also notes that voluntary CSR spending typically serves a business purpose, adding to a company’s bottom line, while mandatory CSR activities impose additional spend, even without fiscal advantage.
In the follow-up study, “Does Mandated Corporate Social Responsibility Reduce Intrinsic Motivation?,” Rajgopal examined the impact of India’s CSR mandate on firms that willingly spent above the required two percent before the government mandate. The study found that if the motivation to “do good” drives the CSR activities of a company, then regulatory intervention may be seen as the government’s distrust or seen as an indication of how much voluntary prosocial behavior society expects from corporations— ultimately reducing the level of CSR activities undertaken to the bare minimum required by law.
The study identified firms that, in the three years prior to the law’s passage, spent more than two percent of their own average profits on CSR activity. After the law was enforced, firms with a track record of high CSR activity significantly lowered their annual expenditure to match the mandate’s two percent minimum. As a result, companies that had willingly exceeded that minimum in years past reduced their CSR expenditure by 67 percent. By contrast, the firms that historically spent less than mandate, increased their CSR spending but not up to the required two percent.
“Interestingly, we also found that after the mandate was enforced, executives channeled CSR spending through more cryptic, philanthropic avenues such as family foundations instead of submitting charitable cash donations that can be tracked and accounted for,” continued Professor Rajgopal. “Further evidence that regulating inherently voluntary activity has the danger of crowding out managers’ intrinsic motivation to do good.”
Together, these two studies suggest that in order for CSR programs to be successful, benefitting both the bottom line of businesses and the social welfare of society, activities must be voluntary— allowing companies and their executives to authentically champion causes they feel connected to in ways that also make sense for their business.
To learn more about the cutting-edge research being conducted by Columbia Business School researchers, visit www.gsb.columbia.edu.
About the researcher
Shiva Rajgopal is the Kester and Byrnes Professor of Accounting and Auditing at Columbia Business School. He has also been a faculty member...Read more.