FSM - Finance & Strategic ManagementSCIENTIFIC PAPER“CSR as a Risk Management tool” Author(s) of paper: Helene Sierant & Thomas Sierant CPR no.: 010789 – 2338 & 121187- 2515 Date of Submission: December 5, 2012
Taking a shareholder perspective, the paper focuses on CSR as a method to reduce idiosyncratic risk. In analyzing this subject, the goal is to complement existing literature on CSR and CFP with the integrative use of risk management and real option theory. Whereas previous research have been ex-posed based and solely consider the reduced risk derived from CSR investments as a benefit among others, this paper encourage proactive incorporation of risk management in the considerations of whether to invest in CSR. The paper’s main differentiation and contribution is a centering on risk management as the purpose for engaging in CSR, and applying real option theory as a basis for ex-ante risk management decision-making. Empirical resolving the research gap and verifying the hypothesis is beyond the scope of this paper. We conclude the paper by considering the implications of the suggested solution and encourage future research within this area.
Over the past decades the concept of Corporate Social Responsibility (CSR) has continued to grow in importance and significance due to external pressure of diverse stakeholders, and has thereby become more prominent on companies’ agendas (Carroll & Shabana, 2010; Beurden & Gössling, 2008). The concept of CSR has been subject to considerable debate, commentary, theory building and continues research (Carroll & Shabana, 2010). The question, of whether CSR investments result in financial and social benefits that outweigh its costs, is intensively scrutinized in existing literature (Schreck, 2001; Carroll & Shabana, 2010). Adherents of CSR argue that it is in the long-term self-interest of corporations to be socially involved (Carroll & Shabana, 2010; Barnet 2007). The overall logic is that CSR increases the trustworthiness of firms and strengthens the relationships with stakeholders. CSR may further result in decreased transaction costs and thereby improved corporate financial performance (CFP), by decreasing employee turnover, reducing operating costs, as well as functioning as a buffer in disruptive events (Carroll & Shabana, 2010; Barnet, 2007). Barnett (2007) and Schreck (2011) argue that, if the financial benefits of CSR meet or exceed the costs, CSR can be justified as a rational investment. According to Kurucz, Colbert and Wheeler (2008), firms may attain four distinct benefits from engaging in CSR; cost and risk reduction; gaining competitive advantage; developing reputation and legitimacy; and seeking win–win outcomes through synergistic value creation. Critics of CSR typically use classical economic arguments, articulated most forcefully by Friedman (Carroll & Shabana, 2010). Traditionally, the expenditures of CSR are considered an illegitimate waste of resources, which conflict with a firm’s responsibility to its shareholders (Schreck, 2011, Barnet, 2007). According to Friedman (1970) “There is one and only one social responsibility of business – to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game…”. Friedman further argued that, social issues are not the concern of business people, and “the business of business is business” (Carroll & Shabana, 2010). Even though CSR have been subject to critique, an increasing number of corporations are accepting responsibilities that extend well beyond the immediate interest of the owners, by considering “non-shareholder stakeholders’ concerns” (Grant, 2010; Clegg, Carter, Kornberger & Schweitzer, 2011). Although the existence, direction and strength of possible links between CSR and CFP have been the subject of several empirical analyses (Schreck, 2011),...
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