Jo, Hoje. "Why Do Firms Engage in CSR?" Presentation to the Value of Values Conference, Santa Clara University. May 15, 2010.

(Rough notes by Lloyd Kurtz, I apologize for inaccuracies or errors of emphasis. - lk)

Jo has done some important work on SRI over the years, including his contribution as a co-author of last year’s Moskowitz Prize-winning study. For this study he used KLD data from 1993-2004 to investigate the relationship between CSR and corporate governance. He argues that CSR functions as a conflict resolution mechanism, a “missing link” between corporate governance and firm performance. This is in opposition to the “overinvestment hypothesis” which suggests firms waste money on CSR to pump up the egos of their management teams or gain other benefits that don’t accrue to shareholders.

“If we do not have conflict-of interest between stakeholders and shareholders, [corporate governance] should directly influence [corporate financial performance]. Because we have a conflict between the two, however, CSR is acting as a conflict resolution device between stakeholders and shareholders.”

“In general, these figures indicate that firms with higher engagement in CSR activities are more likely to be followed by security analysts, and tend to have a higher [market valuation].”

The study finds a strong, direct connection between good governance and good CSR: “We find that while CSR does not affect [corporate governance], [corporate governance] is positively causing CSR, after controlling for various firm characteristics, supporting the conflict-resolution hypothesis.”

If this analysis is right, social investors are on the right track when they put emphasis on governance and CSR in their assessment of firm valuations.