While there may not be a perfect formula to directly convert ongoing investment in social responsibility to a realized financial return, you can generally expect to see an increase in sales, profitability and value.
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.
Seeing the benefits
Having a defined and active CSR initiative can increase marketplace respect for a company, potentially resulting in:
Enhanced ability to attract qualified personnel
Greater employee engagement
Increased sales and profitability
From a valuation perspective, how do you devise a formula that will convert consumer respect into a quantifiable increase in sales or profitability? Maybe a better question is, “Will investors pay a premium to invest in a socially responsible company?” The answer is yes.
Based on a joint survey of 388 fund managers and financial analysts initiated by CSR Europe, Deloitte, and Euronext (2003), 79 percent of fund managers and analysts indicated that social management has a positive impact on firm value in the long-term. More importantly, 51 percent of fund managers and 37 percent of financial analysts would grant a stock price premium to socially responsible companies.
While there may not be a perfect formula to directly convert ongoing investment in CSR to a realized financial return, the research suggests that socially responsible companies generally can expect to see an increase in sales, profitability and value. As such, when valuing a company with a newly initiated CSR policy, the valuation analyst should spend significant time with management in preparing a forecast to reflect the CSR investment, ongoing costs and the expected impact on other financial metrics, such as sales, employee and client retention, and improved employee productivity.
At the conclusion of my research, this naturally curious valuation analyst reaffirmed the old adage that companies really can “do well by doing good.”
This article was taken from here.