This thought-provoking question was recently presented to me by a business owner interested in establishing a corporate social responsibility (CSR) program to designate a portion of the company’s annual profits to benefit the communities in which it operates. I have to admit I was initially puzzled as to how this would impact business value.
When presented with the question, my first instinct was to indicate that the overall value of the company would go down. Since valuation is typically a function of available cash flow to the investors and a multiple or capitalization rate, it stands to reason that if a company is designating a portion of the profits for another purpose, albeit a charitable one, less money is flowing to the investors, decreasing the overall business value.
That answer gave me pause, though. Should a company’s value be penalized because it has chosen to give back and, in theory, enhance our communities? Being naturally curious, this led me to undertake a plethora of research.
Numerous articles and research papers state that CSR has the potential to increase company profits, which is why most large companies are actively engaged in the practice. However, the research could not identify a direct link since CSR is composed of many abstract variables that are generally difficult to define or quantify.
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Originally published by bizjournals.com