Wednesday 29 April 2009

Triple bottom line doesn't help the real bottom line

I've been skeptical about corporate social responsibility. Proponents argue that firms implementing triple bottom line accounting will reap all kinds of reputational benefits. A piece of research that runs counter to these arguments and instead confirms my priors comes from Reitenga, Linthicum and Sanchez, 2009, "Social Responsibility and Corporate Reputation: The Case of the Arthur Andersen Enron Audit Failure"
We examine the influence of social responsibility ratings on market returns to Arthur Andersen (AA) clients following the Enron audit failure. Chaney and Philipich (2002) found that AA's loss of reputation resulted in negative market returns to AA clients following the Enron audit failure. Proponents of social responsibility argue that social responsibility can improve the reputation of the firm, while detractors argue that social responsibility expenditures are a poor use of shareholder money. If social responsibility sends a signal to investors regarding the reputation/ethics of management, social responsibility could mitigate the negative returns to AA clients following the Enron audit failure. Using a matched sample of AA and non-AA firms, we do not find evidence that social responsibility mitigated the negative returns to AA clients following the Enron audit failure. Our results are inconsistent with claims that social responsibility can burnish a firm's reputation in a time of crisis and with prior research indicating a positive relationship between social responsibility and market value.
If the CSR folks were right, Arthur Anderson clients with strong CSR policies would not have taken as big a hit as their less responsible compatriots. Turns out not to have been the case. I suspect that proponents of CSR, at least in our Accounting department, would argue that this is evidence of the failure of markets to recognize the importance of CSR rather than of the failure of CSR and will promote triple bottom line accounting ever the more vehemently.


  1. I suspect that proponents of CSR, at least in our Accounting department, would argue that this is evidence of the failure of markets to recognize the importance of CSROh good, yet another 'people walk past $20 bills' argument. Theory confirmed absolutely everywhere except in the data.

  2. I'm not sure that this is a good test of CSR. Even with perfect information I could imagine that the AA association effect carried so much weight that the CSR effect was completely dominated by it. I don't think this says anything about relative profitabilities of two competing firms, one of which spends money on CSR. Of course fake CSR is probably the most profitable of all.

    BTW as a libertarian, if CSR isn't worth it, but government should stay out of it, how can we maximize societal welfare?

  3. We still would have expected some reduction in the magnitude of the AA effect for strong CSR firms. AA gives a very clean test because it's something exogenous to the firms involved. If you just looked at profitability and found a negative correlation, you couldn't say whether it was because CSR hurt profits or because failing firms jumped for CSR (or a similar but opposite story if CSR correlated with higher profits). Causality is difficult. AA gives an exogenous shock that reveals the uselessness of CSR.

    How do we keep corporations honest? The same way we always do. Tort law and consumer choice.

  4. The exogenous shock only gives a clean test if consumers are rational, there are human biases that can complicate this picture.

    I don't see how tort law, and choice helps with social and environmental ills. There's irreversibility, there's no choice for future generations, there are plenty of incentives for firms to do profitable damage long before choice and Torts kick in it seems to me

  5. If the claim is that CSR helps profitability by projecting a clean safe image for consumers, but then consumers prove too irrational to take the signal, that's hardly a ringing endorsement of that CSR helps improve firm profitability.

    Even in the case of irreversability, there's still compensatability, if that's a word. That's what tort law is for.

  6. I appreciate the discussion! My claim was that in this instance alone there could have been human cognitive biases as a result of AA associationthat eliminated the CSR effect - some possibilities here:

    But, that in general CSR can be profitable. This is of course absent data, but the quoted passage does allude to previously shown positive effects of CSR - why the discrepancy?

    I would think also that CSR profitability depends on the values of consumers, and as such is very dynamic.

    I just can't buy that compensation, even if the law of torts works the way you want it to, is sufficient. Where would the ozone layer be now without regulation for example?

  7. I tend to go for explanations consistent with rationality when folks have real money on the line. If something can be reasonably explained that way, I don't see much point of going to the irrationality-based explanations.

    Tort indeed works badly for non point source pollution; I'm glad that Christchurch has a ban on the use of coal-burning for home heating. Sometimes, the regulatory solution is the more efficient one. But only where there are real external harms caused -- not when it's something ridiculous like failure to pay a "living wage".

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  9. I have heard about the hanging coal smoke smogs of ChCh...

    For me there is too much experimental evidence that, even when it comes to money, utility maximising rationality (at least if utility is the same thing as money) is fighting an uphill battle against innate cognitive bias...From my laymans perspective it seems one thing we've learned from the financial crisis, its that "homo economicus?" bows to animal spirits.

    Now perhaps these innate biases sacrifice individual utility for overall societal welfare or in-group success? That could explain their persistance at least....