Professor David Millon, the J.B. Stombock Professor of Law at Washington and Lee University, recently wrote a review of Robert G. Eccles, Ioannis Ioannou, & George Serafeim, The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance, Harvard Business School Working Paper 12-035 (2012). Here is an excerpt:
Those interested in corporate social responsibility (CSR) and the problems of managerial and investor short-termism should not overlook the paper reviewed here. Robert Eccles, Ioannis Ioannou, and George Serafeim (professors at Harvard, London, and Harvard business schools respectively) make an important contribution to debates among corporate law academics about CSR as an alternative to shareholder primacy. Their paper also has significant relevance to those who are concerned about the costs of shareholder primacy’s current incarnation as an obsession with quarterly earnings and their effects on share prices. The authors present a sophisticated, empirically grounded demonstration of the economic advantages enjoyed by corporations that have chosen to invest in stakeholder relationships and to pursue a long-run approach to wealth creation. Because these companies are shown to outperform financially their more traditionally-minded, shareholder-primacy, short-term-oriented rivals, CSR advocates can assert a ‘business case’ for their belief that corporations should attend to the well-being of nonshareholding stakeholders, including employees, customers, local communities where the firm operates, and those who are affected by its impact on the environment. The business case also lends support to critics of short-termism who have no particular interest in CSR.
A persuasive ‘business case’ for CSR is important because until now the large body of empirical research investigating its efficiency has yielded distinctly mixed results. Further, the ‘ethical case’ for CSR gains limited traction among investors and managers seeking to maximize financial returns. Progressives do need to bear in mind the limits of the business case: it justifies investment in stakeholder well-being only to the extent that there is a financial payoff. Nevertheless, there is no doubt that companies genuinely embracing a stakeholder orientation create more social value than those that do not, even if their motivation is primarily economic.
The full review is available at the Corporate Law JOTWEL at http://corp.jotwell.com.