What is CSR?
Corporate social responsibility is a way in which companies take responsibility for creating social and environmental impact through economic means.
Engaging in CSR means, during the course of a business, a company is making efforts to do good for society and the environment. Through CSR programs, philanthropy, and volunteer efforts, businesses can benefit society and also build their own reputation. CSR activities undertaken by companies play a vital role in creating a positive impact in the minds of people because if the people are not happy with the way of operation of the company, they (company) may lose customers and the brand suffers.
What is share price?
Share price can be defined as the price of a particular company’s share at a particular time. It can also be referred to as the cost of purchasing a security on an exchange.
Two principal factors that affect the share price of a company are the performance, and the external environment. Other factors being the popularity of the company commonly referred to as goodwill, volatility in the market, corporate social responsibility etc.
This article will now demonstrate how various social activities undertaken, affect a company’s profits and share price.
Relationship between CSR and share price
It can be said that there is a positive relationship between social activities undertaken by company and its share price. If a company is undertaking various social activities it will incur additional costs, which will reduce the profit of the company. This will be true if the company is looking at its financial performance from a short-term viewpoint. However, if the company is taking a long term approach its performance will be different.
The activities conducted by the company for social wellbeing of the people and the external environment will not only enhance the reputation of the company but will also make a positive impact on the minds of the people who are concerned about the environment.
The above concept can be explained with the help of an example. Suppose company X ltd wants to start a new recycling program in an attempt to reduce the waste. The program will require installation of new machinery and also training of the workers so that they are efficient enough to handle the machinery. All these activities will require additional cost which will lead to reduction in profits of the company. It may also violate the relationship of the company with its shareholders, who intend to profit off the investment from a capitalistic viewpoint only.
However, if the company looks at the positive side of all these activities with a long-term approach, it will be clear that the introduction of the new recycling program may improve the reputation of the company with the local neighbourhood & also do something good for the environment. All these activities will help the company to earn future profits, both monetarily & in terms of goodwill.
There have been many real-life situations of the community and companies getting together and build a bond so strong, that it would weather any storm. For example, Walmart & Starbucks ensure that they utilize their infrastructure & employees to become the first response team in times of natural calamity or distress. The very people who visit their stores & cafés everyday are the very guys served with goodness too. As a result, these companies have woven themselves deep into the way of life in the area and are now seen as a part of the community rather mammoth corporation trying to squeeze money out of the average Joe, at least in some areas.
An initial cost may result in future earnings by enhancing the reputation of the company in the minds of the people. This cost incurred may be seen positively by the people. Company should spend wisely in the CSR activities without being influenced by the cost that is incurred on these activities.
It can be positively said that goodness will surely translate into profits in the near future. It will attract investors who are willing to buy the shares. Because of the increase in the shares being purchased the share price may go up. Hence, CSR activities should be considered as a revenue center instead of considering it as a cost center.
While the minimum CSR threshold set by the law is 2% of the average profits of 3 years, we, at savart, believe it is not just a mandatory, formality to invest that money in the society. Companies which go over and beyond the call of duty and serve society are the ones that flourish.
P.S. Savart’s proprietary systems are capable of interpreting & analyzing CSR data spend size, nature, frequency of deployment and measure impact to help us understand a CSR mission better and give readers like you, the access to the ‘good guys’ in business.