Corporate Social Responsibility: A Real Options Approach to the Challenge of Financial Sustainability

Abstract

BackgroundIn contemporary complex societies, social values like ethics, corporate social responsibility, and being respectful with the environment, among others, are becoming social requirements. Corporations are expected to fulfill them and, according to empirical evidence, an overwhelming majority aspires to good social valuation. At the same time, the maximization of market share value in the long run continues to be the central corporate goal. Making environmental and social expenses compatible with value creation is a central challenge for corporations since it implies the financial sustainability of Corporate Social Responsibility (CSR).Methods and ResultsThe value creation capacity of CSR projects, mainly through innovation, is widely acknowledged in economic literature and corporate practice. This fact arouses the need of having a quantitative framework capable of summarizing the value creation capacity of the variables involved in CSR projects. With this aim we build up a sensitivity analysis of real option ratios that studies and quantifies the value creation capacity of CSR projects connected with innovation. Ratio analysis has the advantage of being scale independent. Hence, it furnishes a homogeneous framework to express the interaction of value creation variables and, thus, supports strategic thinking quantitatively. Often, CSR expenses can be regarded as preliminary projects that create the opportunity to undertake a full future project. For them, we obtain the minimum expectations scenario that makes financially sustainable a preliminary project that can be interpreted as a call option. We propose a classification of CSR projects from the decision analysis perspective following a two-fold approach: Their relationship with value creation and their links with existing corporate activities. This classification of CSR projects aims at contributing to choose the best capital budgeting method to study the financial sustainability of the project and identifying those CSR projects that fulfill the required features to be studied from the real options perspective.

Social Responsibility Indicators in the Stakeholders’ Perspective

“…(Jensen, 2001). However, this will not be possible without fulfilling the environmental and social requirements (Bosh-Badia, Monitilor-Serrats & Tarrazon-Rodon, 2015). In other words, the stakeholders' interests go beyond the economic and financial results and encompass the organization's social responsibility (Phillips, 2003;Deegan & Blomquist, 2006).…”

“…However, the disclosure of costs should not exceed the long-term organizational gains of the organization. (Verrecchia 1983;Wagenhofer 1990;Jensen 2001;Bosh-Badia, et al, 2015).…”

Sustainability and Ethics in the Process of Price Determination in Financial Markets: A Conceptual Analysis

“…Summarizing, two effects can be associated with any sustainability course of action: the cash-flow effect, i.e., the difference between the income and the expenses, and the risk reduction. In addition, sustainability actions can be associated with the creation of new opportunities that can be studied through real options analysis, as shown in [49]. The same pattern can be applied to decisions focused on social sustainability.…”

Efficiency and Sustainability of CSR Projects

“…As known, real options thinking enlightens strategic analysis (Amran and Kulatilaka [38]). Furthermore, CSR projects, given their nature, often incorporate real options (Bosch, Montllor, Tarrazon [39]). …”