Take 5: How Companies Benefit from Corporate Social Responsibility
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Social Impact Mar 1, 2018

Take 5: How Com­pa­nies Ben­e­fit from Cor­po­rate Social Responsibility

CSR is in vogue. And it can help a firm’s bot­tom line.

Cor­po­rate social respon­si­bil­i­ty has been a buzz­word for a while. And it’s not hard to see how com­mu­ni­ties stand to ben­e­fit when firms are seri­ous about CSR — be it by par­tic­i­pat­ing in a clean water cam­paign or hav­ing a large phil­an­thropic presence.

But what about the firms them­selves? How does doing good affect their bot­tom line? Here, Kel­logg fac­ul­ty share research and per­spec­tives on how com­pa­nies can also ben­e­fit from engag­ing in social­ly respon­si­ble activities. 

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1. Pin­point­ing the Ben­e­fit of CSR

To start with, how do investors react when a com­pa­ny directs its resources toward CSR programs? 

The answer has less to do with the CSR ini­tia­tives them­selves than pre­vi­ous­ly thought, accord­ing to research from pro­fes­sor emer­i­tus Thomas Lys and assis­tant pro­fes­sor James Naughton, both of the account­ing infor­ma­tion and man­age­ment depart­ment, as well as Clare Wang, who was at Kel­logg when the research was con­duct­ed and is now at the Uni­ver­si­ty of Iowa.

Instead, when a com­pa­ny devotes resources to a CSR pro­gram, it sends a sig­nal to investors about the over­all health and finan­cial per­for­mance of the com­pa­ny. Specif­i­cal­ly, com­pa­nies whose CSR spend­ing exceeds investor expec­ta­tions expe­ri­ence pos­i­tive stock returns. The oppo­site is true if the CSR spend­ing is less than investors had expect­ed, the researchers find. 

And this investor response occurs despite the fact that, as the research found, over­all, CSR expen­di­tures do not gen­er­ate a return on invest­ment, so in iso­la­tion, they would be expect­ed to reduce share­hold­er value. 

So what is at work? The researchers explain that when investors see a firm with­hold or devote resources to CSR ini­tia­tives, they infer that its exec­u­tives are act­ing on pri­vate infor­ma­tion about the future earn­ings and cash flows of the firm. In oth­er words, CSR is what rich” com­pa­nies do. 

2. Going Green Pays Off

Most research exam­in­ing the effects of CSR — and in par­tic­u­lar, envi­ron­men­tal­ly friend­ly activ­i­ties— has focused on com­pa­ny stock price. Oper­a­tions pro­fes­sor Sunil Chopra chose a dif­fer­ent angle. He and a co-author ana­lyzed how eco-activ­i­ties affect com­pa­nies’ oper­at­ing per­for­mance — a range of mea­sures that include costs, rev­enues, mar­gins, and profits. 

They used a data­base of press releas­es to iden­ti­fy com­pa­nies in the com­put­er and elec­tron­ics indus­try that announced an eco-activ­i­ty between 2000 and 2011 and that had pub­li­cal­ly avail­able finan­cial data. Then they paired each com­pa­ny with a con­trol firm that did not ini­ti­ate eco-friend­ly prac­tices but was sim­i­lar across a vari­ety of oth­er factors. 

When the researchers ana­lyzed the oper­at­ing per­for­mance of com­pa­nies for two years pri­or to the announce­ment and two years fol­low­ing it, they found that, over­all, eco-activ­i­ties paid off: com­pa­nies that pur­sued them per­formed bet­ter than those that did not, and the dif­fer­ence was espe­cial­ly strik­ing in the sec­ond year fol­low­ing the announcement. 

The biggest long-term ben­e­fit went to com­pa­nies that engaged in activ­i­ties that were more com­plex, such as those that fol­lowed the direc­tives of a stan­dard-set­ting orga­ni­za­tion like LEED or required col­lab­o­ra­tion with oth­er com­pa­nies. For exam­ple, Hewlett-Packard adopt­ed new tech­nol­o­gy from Cit­rix Sys­tems designed to low­er the con­sump­tion of pow­er and cool­ing resources in com­put­er servers. 

If you’re just doing some­thing like chang­ing the light bulbs, that’s sim­ple and has an imme­di­ate ben­e­fit,” Chopra says. But col­lab­o­ra­tions often involve oth­er parts of the sup­ply chain. They’re more com­plex, and they require an ini­tial invest­ment. But they do seem to pay off.” 

3. The Ben­e­fits of CSR Con­tract­ing

More and more com­pa­nies are tying their CEO’s com­pen­sa­tion to achiev­ing CSR goals, a tool known as CSR con­tract­ing. Kellogg’s Dylan Minor won­dered how effec­tive such con­tracts real­ly are — at ben­e­fit­ing soci­ety, as well as the firm. 

So Minor and coau­thors built a data­base of com­pa­nies in the Stan­dard & Poor’s 500 Index that use CSR contracting. 

The pace of growth in CSR con­tract­ing was remark­able. As of 2013, almost 40 per­cent of pub­lic com­pa­nies were cur­rent­ly con­tract­ing in some form,” says Minor, an assis­tant pro­fes­sor of man­age­r­i­al eco­nom­ics and deci­sion sci­ences. Going back ten years, it was only 12 percent.” 

The researchers then used three mea­sures from out­side orga­ni­za­tions to assess each company’s actu­al behav­ior. They found that on all three mea­sures — tox­ic chem­i­cal emis­sions, the num­ber of eco-friend­ly patents filed, and an over­all rat­ing of social respon­si­bil­i­ty — com­pa­nies improved when they used CSR contracting. 

Per­haps more strik­ing: these improve­ments did not come at the expense of a company’s bot­tom line. In fact, the research found that CSR con­tract­ing led a firm’s val­ue to increase by three per­cent over the next year. 

4. You Can Taste the Benevolence

How far do the effects of CSR reach? Can it impact the way cus­tomers per­ceive not just a com­pa­ny, but a company’s products? 

That was the focus of research from mar­ket­ing pro­fes­sor Alexan­der Chernev. He and a coau­thor found that know­ing that a com­pa­ny has behaved eth­i­cal­ly can cause cus­tomers to per­ceive that company’s prod­ucts as per­form­ing bet­ter. They call this effect a benev­o­lent halo.” 

This is a dif­fer­ent sto­ry than just say­ing, Peo­ple like the com­pa­ny more,’” Chernev says. The increase in pos­i­tive per­cep­tion is not based on adver­tis­ing. Con­sumers actu­al­ly expe­ri­ence the prod­uct in a dif­fer­ent way.” 

The researchers devised a series of exper­i­ments in which con­sumers were able to sam­ple a prod­uct — such as tast­ing wine or inspect­ing the results of a teeth whiten­er — and eval­u­ate its per­for­mance. Some par­tic­i­pants were pre­sent­ed with writ­ten descrip­tions of the company’s social­ly respon­si­ble behav­ior: for instance, that the com­pa­ny behind the teeth whiten­er had made siz­able dona­tions to UNICEF, or that the win­ery donat­ed part of each sale to the Amer­i­can Heart Association. 

Impor­tant­ly, the char­i­ta­ble giv­ing was entire­ly unre­lat­ed to the company’s core busi­ness. Nonethe­less, par­tic­i­pants who were told about the giv­ing con­sis­tent­ly rat­ed prod­uct per­for­mance high­er than those who did not learn of any giving. 

Yet, not all cor­po­rate giv­ing is reward­ed with a benev­o­lent halo, the researchers found. 

For one, cus­tomers need to have some uncer­tain­ty about a product’s per­for­mance — oth­er­wise there is no need to infer infor­ma­tion about the prod­uct based on the company’s social respon­si­bil­i­ty. In the wine-drink­ing exper­i­ment, par­tic­i­pants who con­sid­ered them­selves to be inex­pe­ri­enced wine drinkers were more affect­ed by the char­i­ta­ble dona­tions than those who had more self-report­ed expertise. 

More­over, con­sumers must believe the company’s motives to be authen­ti­cal­ly benev­o­lent, rather than mere­ly self-inter­est­ed. And the halo effect is strongest for cus­tomers who believe that cor­po­ra­tions have an oblig­a­tion to act charitably. 

5. If You’re Incon­sis­tent, You’re Toast”

How has CSR changed over the years? A con­ver­sa­tion last year between Shan­non Schuyler, the chief cor­po­rate respon­si­bil­i­ty and pur­pose offi­cer at Price­wa­ter­house­C­oop­ers, and Megan Kash­n­er, Kellogg’s direc­tor of social impact, address­es this question. 

For exam­ple, accord­ing to Kash­n­er, entire indus­tries are com­ing togeth­er around issues they think are impor­tant to soci­ety and to their business. 

Com­pa­nies, Schuyler explains, say, I don’t care if we go head-to-head on the shelves. If we do this togeth­er, we help our indus­try more than if we went it alone.’” She points to issues like band­ing togeth­er to oppose North Carolina’s con­tro­ver­sial bath­room bill.” Lead­ers are talk­ing with their col­leagues on a dai­ly basis because they don’t want to get things wrong or appear out of step.” 

Anoth­er trend, says Schuyler, who is also an adjunct lec­tur­er of social impact: Today, if you’re incon­sis­tent, you’re toast. You’ve got to stand for some­thing, and you have to make sure that your behav­iors and your val­ues guide you through the deci­sion-mak­ing process.” 

Featured Faculty

Thomas Lys

Professor Emeritus of Accounting Information & Management

James Naughton

Assistant Professor of Accounting Information & Management

Sunil Chopra

IBM Professor of Operations Management & Information Systems, Professor of Operations

Dylan Minor

Member of the Department of Managerial Economics & Decision Sciences faculty until 2018

Alexander Chernev

Professor of Marketing

Shannon Schuyler

Adjunct Lecturer of Social Impact

Megan Kashner

Clinical Assistant Professor of Public-Private Interface, Director of Social Impact

About the Writer

Emily Stone is the senior research editor at Kellogg Insight.

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