John L. and Helen Kellogg Professor of Managerial Economics & Decision Sciences; Director of the Center for Mathematical Studies in Economics & Management; Professor of Weinberg Department of Economics (courtesy)
The viewpoint that companies do not exist apart from but as part of society has been broadly accepted for more than a century. The forces that have shaped the debate are shareholders (representing business) and stakeholders (including workers and the rest of society) affected by the actions of business. The government is an often unacknowledged third party. The varying influence of these players at different times has affected expectations for companies in developed nations and emerging markets alike.
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Three Forces Shaping Modern Perceptions on Business
The United States offers a valuable point of reference in this evolution. Over the past 50 years, several trends have altered how business has approached its relationship with society. The protests and social unrest of the late 1960s and 1970s extended to business, painting corporations as a contributor to society’s ills. Leaders such as Ralph Nader and organizations like Greenpeace were adept at highlighting corporate failings and harnessing the growing consumer activism. Their attacks often sought to frame the conversation as an issue not of commerce but morality.
At the same time, the business community sought ways to influence the competitive landscape through a range of channels. In the early 1970s, Lewis Powell (just prior to being appointed to the Supreme Court) penned a memo for the U.S. Chamber of Commerce that laid out a number of ways corporations could alter the terms of the debate. One option that would prove to have far-reaching implications: becoming more involved in the political process. The wave of business deregulation that began in the 1980s was a partial reward for such efforts, as was the 2010 Citizen’s United ruling by the Supreme Court. The result of this coordinated effort, it could be argued, is that business has more influence over government today than in the past.
On the other hand, corporations have been challenged by the arrival of the Internet and social media. Over the past 20 years, the information that companies share, who has access to it, and the response of stakeholders have all changed dramatically. Whereas details about corporate operations had once been limited to financial statements and carefully managed public relations campaigns, the Internet has served to empower consumers as never before, providing them with the tools to gather and share information and hold companies to account. Around the world, the balance of power has shifted away from companies and governments and back to consumers and citizens.
The Rise of CSR
In the face of this global trend, it is no surprise that a growing number of companies have embraced corporate social responsibility. EU companies have traditionally placed a greater emphasis on CSR than their global counterparts, but many multinationals have responded to rising public expectations by undertaking socially responsible initiatives. These expenditures, which were once viewed largely as corporate philanthropy, have become business investments meant to achieve specific objectives: brand building, goodwill among regulators and the public, and talent attraction and retention, among other goals. It’s increasingly de rigueur for companies to issue corporate accountability reports to detail their progress and impact on society. A basic tenet of this approach is that companies can “do well by doing good.”
One interpretation of this finding is that corporate America does not yet understand how to use CSR to its advantage.
Opponents of CSR have questioned whether businesses should be pursuing any investments that do not advance the company’s core interests—namely, maximizing profits for shareholders. The evolving definition of CSR and lack of established metrics has fueled this debate. Indeed, while profits and return on investment are easily quantified, CSR is perceived as delivering intangible benefits that are harder to pin down. Since the standard used to evaluate investments cannot be applied to CSR, the implication is that it does not further business objectives in a significant way. If investments in socially responsible activities do confer an operational advantage, companies should be able to communicate this value in concrete terms.
Taking a More Strategic Approach
The impact of CSR is hard to measure, and this ambiguity has fueled misconceptions about it. Many companies, for example, operate under the assumption that the market rewards investments in CSR. However, in “Pinpointing the Value in CSR,” Kellogg faculty Thomas Lys, James Naughton, and Clare Wang share research findings to the contrary. They documented no link between CSR and current performance. Rather, the research suggests that analysts perceive the level of CSR spending solely as an indication of future financial performance. This finding raises a novel, serious, and research-based challenge to conventional wisdom.
One interpretation of this finding is that corporate America does not yet understand how to use CSR to its advantage. That is not to say that strategic CSR investments cannot deliver value in targeted instances. In “When and How to Drive Real Value with CSR,” Kellogg faculty Daniel Diermeier outlines a number of specific, well-defined conditions under which companies can benefit by deploying CSR initiatives. Therefore, Diermeier lays out an actionable road map that highlights the benefits, as well as the pitfalls, of CSR. In doing so, he offers a way forward.
Even when companies seek to “play defense” with their CSR efforts, the reality can be more complex. One prevailing view among executives is that CSR can insulate the organization from protests and boycotts, but recent research suggests otherwise. In “Managing the Reputational and Market Risks of Social Activism,” Kellogg faculty Brayden King discusses how companies that are well known for their CSR activities are actually more likely to be targeted by protesters. In a sense, companies can become vulnerable not despite but because of their good reputation.
In addition, executives seeking to implement sustainability efforts often find that traditional organizational boundaries can impede progress. This concern is especially salient because, as other Kellogg research demonstrates, CSR needs to be not simply done but done right. Klaus Weber highlights the importance of social actions to achieve results in “The Hidden Drivers of Corporate Sustainability Initiatives.”
In sum, Kellogg faculty offer compelling insight that has strategic implications. Executives who seek to maximize the impact of CSR investments should reexamine their entire approach: how it fits into overall strategy, the ways in which it can deliver value, how to measure its impact, and the best way to communicate progress to stakeholders.
Kellogg and the Aspen Institute are jointly hosting a conference, Rethinking “Shareholder Value” and the Purpose of the Corporation, which will take place in Chicago on March 7 and 8. We have put together a lineup of business practitioners, faculty, and public-sector leaders to weigh in on a range of issues, including CSR. Through this event and the ongoing efforts of Kellogg’s Public-Private Initiative, we will continue to advance the dialogue and offer new insight to business and policymakers alike.
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