Corporate Social Responsibility and Shareholder Value. A Perfect Fit?


Essay, 2021

14 Pages, Grade: 1,3


Excerpt

Table of contents

Table of figures

List of abbreviations

1. Introduction

2. Corporate Social Responsibility

3. Shareholder Value

4. The link between corporate social responsibility and shareholder value
4.1 Criticism of the shareholder value approach
4.2 Reasons for linking the SV approach and the CSR concept to a business strategy

5. Conclusion

Bibliography
Internet sources

Table of figures

Figure 1: Carroll's 4-level CSR pyramid

Figure 2: Calculation of the company value

List of abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1. Introduction

In 1986, Rappaport published the book "Creating Shareholder Value", in which he described the shareholder value (SV) approach as a "new standard for business performance".1 A quantitative, corporate ethical philosophy is addressed with the term "shareholder value", which has always been a matter of course for business investment theorists. Basically, shareholder value describes the mathematical maximization of the net present value of investments.

This entrepreneurial approach was not viewed with skepticism on a global scale until the banking and financial crisis. An alternative approach was examined to overcome the banking and economic crisis. The corporate social responsibility (CSR) approach emerged, which was seen as a sustainable and pluralistic alternative.2

However, the CSR approach is viewed critically from a business perspective. It is questioned to what extent CSR actually influences on the economic success of a company. This will also be the subject of this essay. The aim is to show whether linking CSR and the SV approach creates a corporate strategy that generates monetary gains and represents a perfect fit.3

2. Corporate Social Responsibility

“A concept that serves as a basis for companies to voluntarily integrate social and environmental concerns into their activities and into their interactions with stakeholders.” This is how the term "CSR" was defined in the German language version of the European Commission's Green Paper in 2001 and 2002. This definition was supplemented on July 2nd, 2002 by the following communication from the European Commission: “CSR is not something to be grafted on the core business of companies. Rather, it is about the type of company management."4

“Carroll defines social responsibility of business as encompassing the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time (Carroll, 1979).” These four dimensions describe incentives in which areas social responsibility by companies is in demand and useful.5

Figure 1: Carroll's 4-level CSR pyramid

Editor's note: This image was removed due to copyright reasons.

6 Source: Nello, Rodriguez (2018): Introducing Environmental Corporate Social Responsibility, November 11, 2018, https://studentclimates.wordpress.com/2018/11/11/introducing-environmental-corporate-social-reponsibility/

Based on this representation, one can see which areas are expected to be significantly more from society and which are desirable but not mandatory.7

There is no generally applicable definition for the term CSR. This can be confirmed by the fact that a deviation in the definition of CSR was recognized by many authors from science and practice. As a result, the ambiguous definition of the term creates different principles and ideas about CSR, some of which even contradict each other. When comparing the CSR paradigms of companies and academics across the European Union, enormous differences were found.

This definition from 2001 and 2002 is a widely used definition of the term "CSR". The definition of the term "CSR" evolved in October 2011 and an important message from this definition is that CSR goes "beyond legal requirements". It turns out that CSR cannot be created by regulation through laws, but that every company has to work independently on the development of CSR.8

Due to the difficulty of defining the term "CSR", further elaboration and delimitation will be omitted in order not to go beyond the scope of this essay. For this essay, the definition from 2001/2002 and from Carroll will be used.

3. Shareholder Value

The term "shareholder" can be defined as a person, company, or institution that owns one or more shares of a company's stock. These shares relate to part of the company's equity. Thus, shareholders are co-owners of a company.9

The purchase of shares by a shareholder is a purely financial investment decision. This is the fundamental assumption on which the shareholder value approach is based.10 In return, the shareholders receive their income through their investment from the dividend payments of the stock corporation as well as the price increases of their share package.11 This is also the objective of shareholder value. If a higher return is generated for the shareholders than for comparable investment projects, this represents value creation.12 After all, corporate management is primarily geared towards the interests of the shareholders. To accommodate these interests, the primary goal of corporate management is to maximize the long-term company value. Maximizing the long-term company value is achieved by increasing the return on equity and by maximizing profits.13 Since the shareholders bear a risk responsibility through their investment, they are granted a corporate control right.14

The sum of the value of the equity and the value of the debt results in the company value. The value of the equity corresponds to the shareholder value. Shareholder value is calculated as the difference between the value of the company and its debt.15 16

Figure 2: Calculation of the company value

Company value = debt + Shareholder value

Source based on: Schmeisser, W., Rönsch, M., Zilch, I., Shareholder Value Approach versus Corporate Social Responsibility, 2009, p.11 f.

A company policy based on the shareholder value approach focuses on the market value of the shares and the market value of the entire company.17 As a result, the performance appraisal and the remuneration of the management are also based on increasing shareholder value. Attractive rewards motivate management to behave like stockholders, creating greater engagement. For this reason, value-based management is implemented. This involves, on the one hand, value awareness on the part of managers and, on the other, value benchmarks. The value benchmarks are intended to help management determine the extent to which value has actually been created in the company.18

4. The link between corporate social responsibility and shareholder value

According to the definitions of the two main terms "CSR" and "SV" just described, one could claim that there is a direct contradiction between the two terms. While "SV" is about financial success, "CSR" is about responsibility. Despite the enormously different motives of the two approaches, scientific studies and many practical examples show that an increase in the profitability of companies can be achieved through CSR strategies and measures.19

The reasons for this link and how it can be carried out will be described in more detail later in this essay.

4.1 Criticism of the shareholder value approach

Major criticisms of the SH approach are the monistic corporate view, the short-term orientation, and the focus on quantitative metrics. As a result, qualitative variables are neglected and placed in the background. This is often criticized because non-monetary or qualitative metrics in particular have a strong influence on a company's economic performance. These include for example customer satisfaction, the company's image,

[...]


1 Cf. Poeschl, H., Strategische Unternehmensführung zwischen Shareholder-Value und Stakeholder-Value, 2013, p. 80.

2 Cf. Schmeisser, W., Rönsch, M., Zilch, I., Shareholder Value Approach versus Corporate Social Responsibility, 2009, p.I.

3 Cf. https://www.oekologisches-wirtschaften.de/index.php/oew/article/viewFile/461/461

4 Cf. Schneider, A., Corporate Social Responsibility, 2012, p. 25.

5 Cf. Okpara. J., Idowu, S., Corporate Social Responsibility, 2013, p.5 f.

6 Cf. https://studentclimates.wordpress.com/2018/11/11/introducing-environmental-corporate-social- reponsibility/

7 Cf. https://studentclimates.wordpress.com/2018/11/11/introducing-environmental-corporate-social- reponsibility

8 Cf. Schneider, A., Corporate Social Responsibility, 2012, p. 22-26.

9 Cf. https://www.investopedia.com/terms/s/shareholder.asp

10 Cf. Poeschl, H., Strategische Unternehmensführung zwischen Shareholder-Value und Stakeholder-Value, 2013, p. 80.

11 Cf. Schmeisser, W., Rönsch, M., Zilch, I., Shareholder Value Approach versus Corporate Social Responsibility, 2009, p.12.

12 Cf. Skrzipek, M., Shareholder Value versus Stakeholder Value, 2005, p.12.

13 Cf. Schmeisser, W., Rönsch, M., Zilch, I., Shareholder Value Approach versus Corporate Social Responsibility, 2009, p.89.

14 Cf. Skrzipek, M., Shareholder Value versus Stakeholder Value, 2005, p.12 f.

15 Cf. Schmeisser, W., Rönsch, M., Zilch, I., Shareholder Value Approach versus Corporate Social Responsibility, 2009, p.11 f.

16 Cf. Schmeisser, W., Rönsch, M., Zilch, I., Shareholder Value Approach versus Corporate Social Responsibility, 2009, p.11 f.

17 Cf. Schmeisser, W., Rönsch, M., Zilch, I., Shareholder Value Approach versus Corporate Social Responsibility, 2009, p.89.

18 Cf. Schmeisser, W., Rönsch, M., Zilch, I., Shareholder Value Approach versus Corporate Social Responsibility, 2009, p.22-25.

19 Cf. Schneider, A., Corporate Social Responsibility, 2012, p. VIII.

Excerpt out of 14 pages

Details

Title
Corporate Social Responsibility and Shareholder Value. A Perfect Fit?
College
University of Applied Sciences Essen
Grade
1,3
Author
Year
2021
Pages
14
Catalog Number
V1119112
ISBN (eBook)
9783346482280
ISBN (Book)
9783346482297
Language
English
Tags
corporate, social, responsibility, shareholder, value, perfect
Quote paper
Anastazia Spajic (Author), 2021, Corporate Social Responsibility and Shareholder Value. A Perfect Fit?, Munich, GRIN Verlag, https://www.grin.com/document/1119112

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