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Does it Pay for Private Firms to be Socially Responsible?

Business professionals in a meeting

The expectation that firms consider the impact of their decisions and activities on society and adopt corporate social responsibility (CSR) practices has gained traction over the last few years.

For firms, this can mean engaging in new ways of doing business. According to the 2018 Global Sustainable Investment Review, there has been a major increase in CSR investments globally, 68% since 2014.  These investments are approaching $30 trillion.

Professor Harshit Rajaiya has received a Social Sciences and Humanities Research Council Insight Development Grant to study how investing in CSR initiatives affects the financial performance of private firms. This grant will allow him and his co-researchers to examine how engaging in CSR influences the chances of a firm receiving venture capitalist investments or becoming a publicly-listed company.

This research project, titled “How Do CSR-Related Activities Affect the Future Financial and Economic Performance of Private Firms?” also seeks to determine if there is a relationship between engaging in CSR activities and the valuation of firms that have gone public, as well as whether venture capitalists feel that firms that engage in CSR initiatives will be more successful.

Potential CSR benefits

There are, of course, reputational benefits for firms who engage in CSR practices. But as CSR can mean high costs, does it really pay, particularly, for private firms?

For years, researchers have examined the relationship between adoption of CSR practices and a firm’s financial performance. These studies have shown mixed results. While some have suggested that CSR creates shareholder value, others point to unnecessary costs.

Moreover, these studies have focused on publicly-listed firms. Little is known about how CSR affects the financial performance of privately owned firms. Are private firms who invest in CSR more attractive to venture capitalists and angel investors, and as a result, do they have a better chance to succeed?

You might expect that things would be different for these smaller, often less-known, companies, which face greater financial constraints. Indeed, the survival of privately owned firms is strongly linked to equity financing from venture capitalists or angel investors (accredited investors). As well, private firms, being smaller and less known than public companies, may be more vulnerable to reputational damage if they are perceived to be acting irresponsibly.

Helping firms make strategic decisions  

Privately-owned firms make major contributions to employment, innovation, and sales in North America. For example, a study on corporate investment and stock market listing shows that, in 2010, private U.S. firms were responsible for 58.7% of total sales. But to operate and grow, they often need to secure funding from venture capitalists or angel investors.

Given the increasing public demand for firms to consider their social and environmental impact and the concerns of different stakeholders, knowing more about whether investing in CSR practices makes private firms more attractive for investors can be critical to the firms’ survival and success.

“It is possible that private firm managers learn from our research findings and consider stakeholders, as well as shareholders, as they make strategic decisions about investing in CSR,” says Rajaiya.

By Marie-Claude Allard

Professor RajaiyaHarshit Rajaiya is an Assistant Professor of Finance at the Telfer School of Management, University of Ottawa. His research mainly focuses on entrepreneurial finance, venture capital financing and investment strategies, role of intellectual properties in external financing of private and public firms, FinTech, and the importance of online reviews on corporate financial policies of firms. Learn more about Rajaiya's research.