^aColumbia Business School, 616 Uris Hall, 3022 Broadway, New York, NY 10027, U.S.A. E-mail: gmh1@Columbia.edu

^*This paper was prepared for presentation at the 2004 Annual Conference of the Monte Paschi Vita, organized around the topics of corporate governance and corporate social responsibility. Andrea Beltratti, Ray Horton, Bengt Kristrom and Howard Kunreuther have provided some very thought-provoking comments, and the students in my Spring 04 course "Business and Society – Doing Well by Doing Good?" greatly sharpened my understanding of these issues.

Abstract

I analyze corporate social responsibility (CSR) from economic and financial perspectives, and suggest how it is reflected in financial markets. CSR is defined as a programme of actions to reduce externalized costs or to avoid distributional conflicts. It has evolved in response to market failures, a Coasian solution to problems associated with social costs. The analysis suggests that there is a resource-allocation role for CSR programmes in cases of market failure through private–social cost differentials, and also where distributional disagreements are strong. In some sectors of the economy private and social costs are roughly in line and distributional debates are unusual: here CSR has little role to play. Such sectors are outnumbered by those where CSR can play a valuable role in ensuring that the invisible hand acts, as intended, to produce the social good. It can also act to improve corporate profits and guard against reputational risks.