By Prof. Shan Hongyu, Assistant Professor of Finance, CEIBS

Corporate social responsibility (CSR) refers to the responsibility businesses take for their impact on society. The European Commission defines CSR as the responsibility of enterprises for their impact on society, with companies integrating social and environmental considerations into their business activities.

CSR and ESG are closely related, but they are not interchangeable. CSR concerns a company’s broader responsibility for its impact on society, while ESG refers to environmental, social and governance issues that can be considered in business and investment decisions. The modern ESG framework developed in part through the UN Global Compact’s 2004 Who Cares Wins initiative, which called for these factors to be better integrated into financial analysis and investment decisions.

The social responsibility of business is to increase its profits.

This part-quote from Nobel Prize-winning economist Milton Friedman is routinely cited in debates about corporate social responsibility and the role of business in society. Friedman set out the argument in his 1970 New York Times Magazine essay, The Social Responsibility of Business Is to Increase Its Profits. However, frequently (and sometimes conveniently), the rest of the quote is parked to one side, along with its all-important caveats. The full quote is:

There is one and only one social responsibility of business — to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.

This full quote, and its bearing on economic theory, is essential in aiding our understanding of corporate social responsibility and ESG issues in business. It is especially useful when trying to track how perceptions of business responsibility have changed over the past 130 years alongside the continuing question of how profitability and sustainability can be balanced.

130 Years of Corporate Social Responsibility

Concern about corporate responsibility is much older than the modern terms CSR and ESG. In One Hundred and Thirty Years of Corporate Responsibility, Joel F. Houston, Sehoon Kim and Boyuan Li trace recurring US debate about the responsibilities of business to at least the end of the Gilded Age in the 1890s. They point to Andrew Carnegie’s 1889 Gospel of Wealth and the Berle-Dodd debate of the early 1930s over the corporation’s obligations to shareholders and the wider public.

The debate continued into the second half of the 20th century. Milton Friedman’s 1970 argument placed profit maximisation at the centre of corporate responsibility, and the researchers note that this shareholder-focused view became widespread from the 1980s into the 2000s. In 2004, the term ESG entered the discussion through the Who Cares Wins initiative, linking environmental, social and governance considerations more directly with financial value.

Houston, Kim and Li’s historical index also shows how the focus of public attention has changed. Social issues such as inequality and discrimination dominated much of the earlier period, while environmental concerns became increasingly prominent after the 1950s. Since 1990, their US evidence shows a gradual rise in attention to both environmental and social issues.

The 2008 global financial crisis then brought renewed scrutiny to the relationship between profit maximisation and wider social consequences, setting up the question at the heart of the next section.

Does Friedman’s Argument Still Hold? 

Friedman’s view became highly influential in the decades after his 1970 essay, particularly as shareholder value gained prominence in corporate thinking. Houston, Kim and Li note that what became known as the “Friedman Doctrine” of shareholder supremacy was widespread from the 1980s into the 2000s.

The global financial crisis of 2008 put that approach under renewed scrutiny. The crisis exposed excessive risk-taking and weaknesses in the financial system, while the resulting recession imposed enormous economic costs. A 2010 Bank of Canada assessment estimated that the decline in economic output associated with the crisis amounted to approximately $2 trillion globally.

So, does Friedman’s argument still hold up to scrutiny? I believe it does, but only if we consider the following four micro-foundations:

The horizon must be long-term, not immediate

The business must take the broader view of maximising value for all shareholders, not one single entity. A short-term horizon unduly focused on the immediate financial gains of a single, or select few, shareholders does not produce socially responsible outcomes.

The market must be competitive

As Friedman said, a competitive market is essential to producing socially responsible outcomes in business. Companies with monopolistic control of a market routinely abuse their market position and social capital (e.g.: customers’ personal data) to maximise their profits without proper consideration of ESG factors.

Institutions must be well developed and functioning

Well-developed, well-functioning legal and regulatory systems are needed to protect the rights of the most vulnerable groups in society. They curtail the worst impulses of businesses and guide them towards making socially responsible decisions.

Shareholder welfare must go beyond stock price

Maximising shareholder value is not always the same as maximising stock price. Increasingly, today’s investors want to buy into something that aligns with their political, social, and environmental agenda. Therefore, improving shareholder welfare today means taking a more holistic approach, incorporating both price-dimensional and non-price-dimensional preferences.

Only when these four micro-foundations are in place can businesses satisfy both their profit incentive and their broader social responsibilities in a consistent manner.

What Public Attention to ESG Reveals

Zooming out from the specifics of economic theory, public attention to environmental and social issues related to business has changed considerably over time. Houston, Kim and Li (2024) use natural language processing and machine-learning techniques to construct a monthly index of this attention using historical US news text dating back to 1890.
Their analysis identifies two striking patterns in environmental (E) and social (S) attention:

1. Public attention to environmental issues rises during periods of relative economic stability and prosperity. It is also positively associated with partisanship and political polarisation.
2. Public attention to social issues rises during periods of economic and social instability. It is also higher during periods of volatile real GDP growth, unemployment, recessions and greater wealth inequality.

Put simply, public attention tends to turn more towards environmental issues when economic conditions are relatively stable, while political division can also heighten environmental concerns. Social issues receive more attention when the economy is under strain or when people face greater social and economic uncertainty.

These findings come from a US evidence base, using historical news text from The Wall Street Journal and The New York Times, so they should not be read as a direct measure of global public opinion. Even so, they show how attention to different aspects of corporate responsibility can rise under very different economic and political conditions. For companies, this reinforces the importance of understanding which ESG issues are receiving attention among their investors and customers.

Where CSR Research Goes Next

Though we are standing on the shoulders of 130 years of data, discussions, and reflections on ESG, the work is by no means done.

Continually improving our understanding of the role and public perception of ESG in business is invaluable for guiding companies to be more socially responsible. Accordingly, academics are advancing the frontiers of knowledge about ESG issues. The four key areas of focus for this line of academic enquiry today are:

Measurement: How can we develop a set of consistent, objective and comparable measurements on ESG issues and approaches?

Matching: How can we better match sustainable products with sustainable customers, or sustainable lenders with sustainable creditors?

Pricing: How can we price financial instruments like green bonds, carbon pricing, and green stocks fairly, transparently, and effectively?

Impact: How can we accurately gauge the societal impact of a given ESG measure?

By exploring these areas, academics, businesses and the wider public can all play a part in improving our collective understanding of ESG issues and how best to approach them. To think like an economist in an era where corporate social responsibility is gaining in popularity and importance, the following three attitudes are necessary:

• Respect facts and believe in the power of data and scientific approaches.
• Address the most urgent problems with real-world implications.
• Investigate deeply, but think broadly, while embracing the unknown.

This summary is based on the keynote speech entitled “On the 130 Years of Corporate Social Responsibility” by Assistant Professor of Finance Shan Hongyu at the recent CEIBS Innovation Forum Hong Kong.

Prior to joining CEIBS, Prof. Shan Hongyu was an Assistant Professor of Finance at Gabelli School of Business at Fordham University. Prof. Shan received his Ph.D. in Finance from University of Florida and B.A. in Economics from University of Michigan.

Frequently Asked Questions

Can a company maximise profit and still be socially responsible?

Yes. Profit maximisation and social responsibility can be compatible, but only when the conditions discussed above are in place. The point is not that profit and responsibility are automatically aligned. Rather, the market and institutional setting, together with how shareholder welfare is understood, determine whether the two can coexist.

Why is corporate social responsibility drawing more attention now than in the past?

Attention to corporate social responsibility has risen and fallen over time rather than moving in one direction. In the US evidence examined by Houston, Kim and Li, the 2008 global financial crisis marked an important turning point in the modern debate, while inequality, political polarisation and economic volatility are associated with greater attention to different aspects of corporate responsibility.

Who is responsible for making business socially responsible?

Responsibility is shared across the system in which companies operate. Institutions establish and enforce the rules, investors can express preferences that extend beyond financial returns, and companies make decisions within competitive markets. Socially responsible business therefore depends on the incentives and constraints surrounding companies as well as the choices companies themselves make.

What evidence is the 130-year picture based on?

The 130-year picture is based on the Environmental and Social Issues in Business (ESIX) index developed by Houston, Kim and Li. Using natural language processing and machine learning, the researchers analysed roughly four million business- and economy-related articles from The New York Times and The Wall Street Journal, producing a monthly US series from 1890 to 2023.