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Corporate social responsibility increases company value

31 January 2008

Limiting the waste produced by a factory, creating safer working conditions for personnel or introducing products to the market that have not involved child labour are all matters that affect company profits. According to PhD student Lammertjan Dam, the other side of the coin is that corporate social responsibility (CSR) increases the value of a company. He claims that responsible business practices can prove profitable in the long run. Dam will be awarded a PhD by the University of Groningen on 7 February 2008.

In four sub-research projects, Dam investigated the economics of corporate social responsibility, with the emphasis on the role of financial markets and institutions. A great deal of contradictory literature has appeared in the last thirty years concerning the relationship between CSR and corporate financial performance.

Goodwill

Dam shows that current literature reveals a paradox by differentiating between the profits and the value of an enterprise. C SR costs money and thus reduces profits, but there is another type of value that should also be taken into account. ‘There is no trade value in a healthy environment or better working conditions, but there is appreciation. That appreciation can influence market forces via investors.’ Investors prefer not to invest in companies who engage in child labour or ignore environmental factors. This is not always because investors themselves consider these matters important, but also because ‘irresponsible’ behaviour is actually very risky behaviour. Responsible entrepreneurs will thus create some form of goodwill with investors. As a result, although CSR may not result in instant profits for a company, in the long run it will increase the final value of the enterprise.

No negative reactions in the stock market

In supplementary research, Dam concludes that the stock market does not react negatively towards banks who strive for sustainable development. He investigated the differences between banks that did and did not sign the Equator Principles: a treaty that obliges banks to adopt certain social and environmental benchmarks. Dam found no significant differences, except in the field of social performance. What he did notice was that it was mainly the larger banks who signed the principles. Dam: ‘Perhaps there are some costs involved and large banks can profit from economies of scale. Or else these banks just cannot risk being irresponsible because all eyes are trained on them.’

Future generations

Dam also investigated socially responsible investments. The perennial problem is that future generations will have to cope with the consequences of the pollution of today’s generations. According to Dam, one solution could be responsible investment. A company that links social and environmental principles to its working methods must continue to abide by these principles in order to preserve the value of its shares. Responsible investment is thus a way to link generations to each other and to stimulate sustainable development.   

Pollution paradises

Finally, Dam investigated whether supposed ‘pollution paradises’ actually exist. He concludes that strict European social and environmental legislation does indeed mean that irresponsible multinationals have to move to developing countries. Moving to developing countries is not actually an attractive prospect for responsible enterprises. Dam: ‘I want to demonstrate with my thesis that external effects, for example poor environmental policy, child labour or poor social circumstances, will eventually reflect on the value of a company. Investors who look to the future will invest in companies that are not only profitable now, but will also create value in the future.’ 

Curriculum Vitae

Lammertjan Dam (Groningen, 1977) graduated with honours in Econometrics at the University of Groningen. He conducted his PhD research at the Faculty of Economics and Business of the University of Groningen within the framework of the project ‘Milieu en Economie’ [The environment and economics], financed by NWO. His supervisors were Prof. L.J.R. Scholtens and Prof. E. Sterken. Dam is currently a lecturer in Finance at the Institute for Economics, Econometrics and Finance (IEEF) at the University of Groningen. His thesis is entitled ‘Corporate Social Responsibility and Financial Markets’.

 

Information:  Lammertjan Dam, tel. 050-363 65 18, e-mail: l.dam rug.nl

Last modified:15 September 2017 3.26 p.m.
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