V23-23

Question

In recent years, the concept of corporate social responsibility (CSR) has become increasingly prominent in business practices worldwide. CSR refers to the idea that companies should operate in a manner that is socially responsible, not just profitable. This involves a range of activities, including environmental-sustainability efforts, ethical labor practices, and community engagement. As more corporations adopt CSR policies, there is growing debate over the impact of these policies on business performance.
 
Some business analysts argue that CSR initiatives may lead to increased costs for companies, potentially reducing their competitiveness. These costs could include higher spending on sustainable materials, increased wages for fair labor practices, and investments in community projects. A study conducted by economists Jensen and Murphy analyzed the performance of companies with strong CSR policies. Their findings suggested that, on average, these companies experienced a 1.2-percentage-point decline in short-term operating margins, attributed to the additional expenses incurred by implementing CSR practices.
 
However, the study also noted that the impact of CSR on profitability varied across industries. Companies in sectors where consumers are more sensitive to ethical and environmental issues, such as retail and consumer goods, tended to see a lesser impact on their bottom line. Moreover, in industries where brand reputation is crucial, CSR initiatives appeared to have a positive long-term effect on profitability. The study also found that smaller companies, with their limited resources, were more cautious in implementing extensive CSR policies, perhaps due to the fear of increased costs outweighing the benefits.

The passage suggests which of the following regarding CSR initiatives?

A. Companies in all industries experience identical short-term profitability declines from CSR initiatives.
B. Implementing CSR policies is more financially feasible for larger corporations than for smaller ones.
C. The chief reason companies adopt CSR policies is to secure immediate financial gains.
D. CSR initiatives invariably enhance a company’s brand reputation, regardless of industry.
E. Industries in which consumers are less sensitive to ethical or environmental issues tend to invest more heavily in CSR initiatives.

bb · Answer

Official Solution:

In recent years, the concept of corporate social responsibility (CSR) has become increasingly prominent in business practices worldwide. CSR refers to the idea that companies should operate in a manner that is socially responsible, not just profitable. This involves a range of activities, including environmental-sustainability efforts, ethical labor practices, and community engagement. As more corporations adopt CSR policies, there is growing debate over the impact of these policies on business performance.
 
Some business analysts argue that CSR initiatives may lead to increased costs for companies, potentially reducing their competitiveness. These costs could include higher spending on sustainable materials, increased wages for fair labor practices, and investments in community projects. A study conducted by economists Jensen and Murphy analyzed the performance of companies with strong CSR policies. Their findings suggested that, on average, these companies experienced a 1.2-percentage-point decline in short-term operating margins, attributed to the additional expenses incurred by implementing CSR practices.
 
However, the study also noted that the impact of CSR on profitability varied across industries. Companies in sectors where consumers are more sensitive to ethical and environmental issues, such as retail and consumer goods, tended to see a lesser impact on their bottom line. Moreover, in industries where brand reputation is crucial, CSR initiatives appeared to have a positive long-term effect on profitability. The study also found that smaller companies, with their limited resources, were more cautious in implementing extensive CSR policies, perhaps due to the fear of increased costs outweighing the benefits.
 
 The passage suggests which of the following regarding CSR initiatives?

A. Companies in all industries experience identical short-term profitability declines from CSR initiatives.
B. Implementing CSR policies is more financially feasible for larger corporations than for smaller ones.
C. The chief reason companies adopt CSR policies is to secure immediate financial gains.
D. CSR initiatives invariably enhance a company’s brand reputation, regardless of industry.
E. Industries in which consumers are less sensitive to ethical or environmental issues tend to invest more heavily in CSR initiatives.

A) Incorrect. The passage explicitly states that the profitability impact “varied across industries,” with retail and consumer-goods firms experiencing a lesser effect. Therefore, it contradicts the idea that all industries incur “identical” short-term declines.
 
B) Correct. The final sentence notes that “smaller companies ... were more cautious” about extensive CSR because their limited resources heightened cost concerns. By implication, larger corporations, having greater resources, find it more financially feasible to implement CSR policies.
 
C) Incorrect. Nowhere does the passage claim that firms adopt CSR primarily to secure immediate financial gains. In fact, the study reports a 1.2-point decline in short-term margins, suggesting the opposite.
 
D) Incorrect. The text says CSR can have a “positive long-term effect on profitability” in industries where brand reputation is crucial, implying the benefit is conditional, not “invariable.”
 
E) Incorrect. The passage states that companies in sectors whose consumers are more sensitive to ethical and environmental issues invest in CSR and see smaller profit hits. It does not claim that industries with less-sensitive consumers invest more; this choice reverses the relationship.

Answer: B

Hrs31 · Answer

I don’t quite agree with the solution. There is no comparison stated in passage for large and small companies. However, in last paragraph brand reputation is mentioned.

dhruvajmera06 · Answer

I don’t quite agree with the solution. we can not assume anything in an RC question it should be D

bb · Answer

Hi and sorry about the wait.

In terms of the question, here is what the passage says:

“The study also found that smaller companies, with their limited resources, were more cautious in implementing extensive CSR policies, perhaps due to the fear of increased costs outweighing the benefits.”

From that statement we can safely infer:

- Smaller firms = resource-constrained leads to CSR riskier/less affordable.
- Larger firms (which by definition have more resources than smaller ones) are less constrained, so the cost–benefit balance is more favorable e.g. CSR is more financially feasible for them.

That’s all Choice B is saying. The inference relies on a simple, GMAT-style contraposition: If limited resources make you cautious, abundant resources make you less cautious (and therefore better able to implement the initiative).

bb · Answer

Thank you. I see there was a very brief explanation for this question. I have expanded the explanation and tweaked a few words here and there in the answer choices.

GmatTest2026 · Answer

I like the solution - it’s helpful.

GaganB · Answer

V23-23 - The passage suggests which of the following regarding CSR initiatives?

(A) Companies in all industries experience identical short-term profitability declines from CSR initiatives

Refer to the statement  "Their findings suggested that, on average, these companies experienced a 1.2-percentage-point decline in short-term operating margins, attributed to the additional expenses incurred by implementing CSR practices."  
 The quote refers to 'these companies' that have strong CSR policies and it is these companies on average that experience 1.2% decline in short-term profitability. Whereas (A) talks about 'all industries' experience identical short-term profitability. So (A) basically distorts a given statement in the passage, while keeping the short term profitability declines intact, to make the choice lucrative.

(B)  Implementing CSR policies is more financially feasible for larger corporations than for smaller ones.

Refer to the statement  " The study also found that smaller companies, with their limited resources, were more cautious in implementing extensive CSR policies, perhaps due to the fear of increased costs outweighing the benefits."  
 One needs to keep in mind this GMAT-style contraposition which is very commonly tested in RCs. If smaller companies are cautious in implementing extensive CSR policies due to fear of increased costs, the reverse being, larger companies would be less cautious/ more comfortable in implementing CSR policies. We can select (B).

(E) Industries in which consumers are less sensitive to ethical or environmental issues tend to invest more heavily in CSR initiatives

This looks like a similar example of contraposition as discussed in (B) above. Refer to this statement    "Companies in sectors where consumers are more sensitive to ethical and environmental issues, such as retail and consumer goods, tended to see a lesser impact on their bottom line".    But this is not exactly a contraposition. The answer choice has attempted a 'Comparison' without sufficient evidence. From the passage -- Industries -   more sensitive   to ethical/environmental issues -   invest in CSR   and have less impact on profits; From option (E) -- Industries -   less sensitive   to ethical/environmental issues -   invest more heavily in CSR.   We dont have sufficient data in the answer option or in the passage to confirm this intended comparison.

V23-23

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