Illustration by Rebekka Takamizu

Over the past decade, global companies have increasingly embraced corporate social responsibility (CSR). Indeed, 57 percent of Fortune 500 companies issued corporate accountability reports in 2011, up from 20 percent the previous year.

Of course, these investments are often far from altruistic: Executives expect a positive return for integrating CSR into their mission. The philosophy that doing well by doing good has become conventional wisdom. However, recent analysis by Kellogg upends many widely held beliefs about the impact of CSR and suggests that executives would do well to re-examine their CSR strategy.

Kellogg faculty members Thomas Lys, James Naughton and Clare Wang conducted research to determine whether CSR expenditures actually delivered positive financial returns for companies. They sought to address two primary issues: Is CSR associated with improved financial performance? If so, does CSR spending lead to improved financial performance, or does the anticipation of improved financial performance lead to CSR expenditures?

To explore the link between CSR expenditures and financial performance, the team collected information on CSR activities for hundreds of companies from 2002 to 2010 across a number of industries. While Lys's team found that CSR investments didn't deliver better financial performance, investors responded favorably to companies that spent significant CSR dollars. The reason: Analysts assume that only companies doing well financially could afford to make outsize investments in areas, such as CSR, that weren't core to the business.

These findings contradict the current school of thought, which holds that CSR expenditures create value by being mutually beneficial to the company (through better performance) and society. Instead, the team's research found that CSR expenditures typically reduce shareholder value. The reason the stock market sometimes reacts positively to CSR activities is because when a company chooses to invest in CSR, investors interpret it as a signal that executives expect higher future earnings. So while executives may believe that CSR creates goodwill among consumers and regulators — and it may do so in targeted circumstances — the research by Lys, Naughton and Wang indicates that from the perspective of investors, these expenditures do not make a sufficient contribution to the bottom line to justify their capital costs.

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