Corporate Social Responsibility v. Corporate Shareholder Responsibility

Whether corporate social responsibility (CSR) is beneficial to shareholders remains a topic of considerable debate. Recent studies suggest that some socially beneficial corporate expenditures (e.g., to reduce environmental harm and thereby the firm’s risk exposure) create value for shareholders. In contrast, other types of such expenditures (e.g. to improve the environment beyond what is necessary to comply with the law or mitigate risk), are not viewed by shareholders as value-enhancing. However, there is no evidence on whether individual firms differentiate between CSR expenditures that do and do not benefit shareholders.

In a recent study, we examine differences in the CSR policies of family and non-family firms. Family firms provide an ideal setting for examining whether firms differentiate between CSR that is and is not beneficial to shareholders. If family firms operate more like sole-proprietorships than widely held non-family firms, one would expect to see more spending by family firms on social causes that bring noneconomic benefits to the controlling family but no financial benefits to non-controlling shareholders. On the other hand, if family firms are more concerned about profits than are non-family firms—due to a family’s large and undiversified stake in the firm—one would expect them to spend less on CSR that does not enhance shareholder value.

We use MSCI’s KLD Research and Analytics data to measure the CSR activity for the firms in our sample, with environmental performance as the proxy for CSR. The financial consequences of environmental policies that firms choose are likely to be considerably larger than other socially relevant policies, and so differences among firms are likely to be clearest in the environmental area. KLD provides a set of binary indicator variables, which reflects either environmental strengths or environmental concerns. For each firm, KLD provides five sub-indicators for environmental strengths and seven sub-indicators for environmental concerns. The sub-indicators for environmental strengths capture aspects of a firm’s environmental policy aimed at improving the environment (“greenness”), and environmental concerns capture aspects that are related to various environmental risk exposures (“toxicity”). KLD assigns a value of one if a firm meets or exceeds a threshold for each sub-indicator and zero otherwise. Our analysis focuses on aggregating a firm’s environmental strengths and concerns to measure its greenness and toxicity, respectively.

We show an economically and statistically significant negative association between family firms and greenness. This finding suggests that, on average, family firms are more attentive to shareholder interests than are non-family firms in green spending. Our findings for environmental concerns provide somewhat weaker evidence that family firms are also more responsible to shareholders in alleviating toxicity. Taken together, our findings show that, on average, the corporate environmental policies of family firms are significantly more consistent with shareholder wealth maximization than are the policies of non-family firms, since family firms spend less on  environmental matters that benefit society but not shareholders while spending at least as much as non-family firms on environmental actions that benefit both.

We also investigate whether the nature of the family’s involvement has any impact on the reported relationships between family firms and greenness and toxicity. We find that regardless of whether a family firm has a founder, descendent of a founder, or a non-family member as CEO, it has lower greenness than do non-family firms. Indeed, in a family-controlled firm where neither a founder nor a descendent is the CEO, the reduction in greenness  is even more pronounced when compared with non-family firms. As with the previous analysis, regardless of who the CEO is, there is no difference between family firms and non-family firms on toxicity. Similarly, we find a negative relationship between the degree of family control and greenness and no relationship between the degree of family control and toxicity.

Our results persist across different times, including during the period of the recent financial crisis. We find that during and before the crisis, family firms had lower greenness. Interestingly we find that during the crisis, family firms had lower toxicity than did non-family firms.

Our findings contribute to the literature by showing that, on CSR spending, family firms are more attuned to shareholder value than are non-family firms. When shareholder and societal interests coincide, as when reducing toxicity that can harm society and increase the firm’s risk, family firms do at least as well as non-family firms in protecting shareholder interests. However, when shareholder and societal interests diverge, as when spending on the environment benefits society but not shareholders, family firms favor shareholders far more than do non-family firms by spending much less on the environment. These findings contrast sharply with studies of corporate governance in family firms that show family firms are less responsible to their non-family shareholders. When it comes to CSR, our findings suggest that the actions of the family are more consistent with the interests of shareholders (including non-family shareholders) than are the actions of managers of non-family firms. That supports the argument that the lack of diversification in controlling families’ investments creates strong incentives for acting in the financial interest of all shareholders, which overcomes any noneconomic benefits families may derive from engaging in social causes that do not benefit non-controlling shareholders.

This post comes to us from Amal P. Abeysekera, a PhD student in finance, and Chitru S. Fernando, the Rainbolt Chair and professor of finance, at the University of Oklahoma’s Price College of Business. It is based on their recent paper, “Corporate Social Responsibility versus Corporate Shareholder Responsibility: A Family Firm Perspective,” available here.

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