In Practice Can you add value while doing good

Does doing social good hurt or help firms? On the one side of this argument stand those who believe that firms that expend considerable resources to generate social good are misguided and are doing their stockholders a disservice. On the other side, there are those who believe that socially conscious firms are rewarded by consumers and investors. The evidence is mixed and will undoubtedly disappoint both sides:

• Studies indicate that the returns earned by stockholders in socially conscious firms are no different than the returns earned by stockholders in the rest o the market. Studies of ethical mutual funds find that they neither lag nor lead other mutual funds.

• There is clearly a substantial economic cost borne by companies that are viewed by society as beyond the pale when it comes to creating social costs. Tobacco firms, for instance, have seen stock prices slide as investors avoid their shares and profits hurt by legal costs.

• When firms are profitable and doing well, stockholders are usually willing to give managers the flexibility to use company money to do social good. Few investors in Microsoft begrudged its decision in 1998 to give free computers to public libraries around the country. In firms that are doing badly, stockholders tend to be much more resistant to meeting society's ills. Summarizing this evidence, we can draw some conclusions. First, a firm's foremost obligation is to stay financially healthy and to increase value; firms that are losing money cannot afford to be charitable. Second, firms that create large social costs pay a high price in the long term. Finally, managers should not keep stockholders in the dark about the company's charitable giving; after all, it is the stockholder's money that is being used for the purpose.

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