Faculty member in the Department of Managerial Economics & Decision Sciences until 2014
Executives can improve their bottom lines by using CSR in targeted circumstances.
Managing corporate social responsibility (CSR) efforts carefully has become increasingly important for multinationals like Walmart—which has faced steady criticism for its practices related to labor, the environment, and other areas—and smaller, less controversial players alike. CEOs increasingly rank CSR as a “central” or “important” concern, as reflected in the rising tide of improved labor practices (Adidas, IKEA), animal welfare policies (McDonald’s), and other socially beneficial corporate initiatives and policies. The underlying idea is that corporations can better achieve their business objectives by acting more responsibly. Mounting evidence, however, suggests that, on average, CSR initiatives fail to create their intended economic value or actually destroy this type of value.
We’ll send you one email a week with content you actually want to read, curated by the Insight team.
Still, CSR can drive economic and reputational valuein targeted circumstances and, improve a company’s bottom line. To make CSR a value-generating strategy executives must understand the contexts in which responsible practices are more likely to pay off and implementing the practices with specific principles, including competence, in mind. In this sense CSR works like other dimensions of strategic positioning, such as the quality of products or services offered. Pursuing a strategy focused on high quality does not make sense for every company in every situation, but it can yield value in some contexts.
Where CSR Creates Value
Many of the economic benefits CSR drives for corporations fall in the domains of operational and regulatory risk. Within operations, a focus on responsible practices can yield process improvements that reduce costs and boost the bottom line. This is especially true of environmental practices. For example, BP’s adoption of a greenhouse emissions cap and corporate emissions trading system in 1997 both reduced emissions significantly and yielded a $600 million increase in net income by improving operational efficiency. The CSR focus helped management identify and decrease the flaring of natural gas from some wells, among other improvements. Such uncontroversial forms of CSR should be adopted by any company seeking operational improvements, as these can uncover sources of value creation that executives might otherwise miss. Sustainability initiatives often hit the “sweet spot” of generating tangible operational and environmental benefits simultaneously.
CSR may also be used strategically to manage various risks, again creating value or preventing its loss. Rather than developing operational efficiencies, the goal here is to avoid negative attention from stakeholders including social and/environmental activists, politicians, the courts, and the media—in other words, to avoid competitive disadvantages associated with reputational damage. Collectively, the values held by influential stakeholder groups yield “rules of the game” for corporations that go beyond formal laws and regulations, vary significantly by market, and tend to be ever-changing. Consider how animal welfare policies were rare among US corporations until the early 2000s, but have become standard today. Investment in socially responsible practices to lower the costs of reputational damage may include voluntary adoption of practices preempting regulatory action, such as the spirit industry’s advertising restrictions and the entertainment sector’s ratings systems.
The markets reward responsible practices perceived as a good “insurance policy” against risks. Research shows that companies with strong records of responsible practices lost $600 million less in market value when facing product recalls than peers with limited CSR activities. Conversely, other research demonstrates that environmentally focused activism against a company increases the perception of risk associated with the firm, negatively affecting its financial performance.
A third domain where CSR may create value is in the “market for virtue.” In this arena, firms aim to compete for customers, employees, and investors by satisfying an explicit or implicit demand for products, services, and practices that address the common good. While many corporations continue to pursue this strategy, there is only anecdotal evidence to support it broadly, and mounting findings show that it may in fact destroy economic value, as suggested earlier. In this context, challenges include the difficulty of discerning whether addressing customers’ social values translates into a higher price point or increased volume, and understanding how best to protect a socially responsible brand from imitation by competitors.
Good Samaritan-ship and Other Principles of Effective CSR
Once managers understand the contexts in which CSR can drive economic value, they need to think about how best to deploy responsibility initiatives to capture that value. Recent research has uncovered several principles that corporations need to mind to generate a positive stakeholder response. One example situation related to these principles is where the firm has no perceived causal role, such as natural disasters. In such situations we can apply the Good Samaritan Principle, based on the biblical story of the Samaritan who helped an injured robbery victim others had merely passed by. Like the Samaritan, companies offering their help should be seen as motivated more by altruism than self-interest. Similarly, firms are judged by the competence and warmth they demonstrate when helping; in a disaster situation individuals view the company as a community member, rather than a provider of goods and services in exchange for benefits. Laboratory experiments confirm that people evaluate firms more positively when they see evidence of competence and warmth—for example, having executives assist victims personally is viewed far more positively than just donating money. So it is not just the thought that counts, but the way CSR efforts are carried out.
To maximize reputational and economic value, businesses can look to several principles when deploying responsibility efforts as related to natural disasters and other situations.
In the specific context of natural disasters, the strategic fit of responsibility efforts with companies’ core products or capabilities is less important. A “well-fitting” response may even be viewed negatively. For example, if a beauty company were to send cosmetics or skin moisturizer to victims needing clean water, the public would likely pan them for it, seeing the move as self-serving. Communications represent another potential pitfall for CSR efforts. In 2000, when Philip Morris spent $150 million on advertising to publicize the $115 million it had contributed to battered women’s shelters and other causes, the company was attacked widely. Blowing one’s own horn too loudly leads the public to suspect ulterior motives. In contrast, Walmart’s communications strategy around its efforts to help Hurricane Katrina victims in 2005 highlighted the corporation’s competence (for example, delivery of water and other supplies well before the federal government’s relief effort) and warmth (such as store managers voluntarily distributing nonperishable items), yielding large reputational benefits. Walmart allowed store managers and truck drivers to talk directly to the media. The emotional impact of their personal stories of neighbors helping neighbors played an important role in boosting positive perceptions of Walmart and energizing the business’s employees.
In short, to maximize reputational and economic value, businesses can look to several principles when deploying responsibility efforts as related to natural disasters and other situations:
• Authenticity: Actions should be seen as motivated more by altruism and caring than self-interest • Competence: Actions should reflect skillful handling of the situation that demonstrates understanding of target groups’ needs; this is more important than strategic fit • Communication: Communication about actions should reflect their warmth and competence, and avoid even the appearance of self-serving motivations
Companies face increasing expectation that they will not only maximize shareholder value but also contribute to their broad communities on multiple dimensions. That means executives need to understand when CSR efforts can drive economic and reputational value, and how to implement them to maximize that value. Taking this approach can transform CSR from a potentially value-destroying product of good-but-misguided intentions to a real value-generating strategy.
This article is adapted from chapter 5 of Daniel Diermeier, Reputation Rules (New York: McGraw-Hill, 2011).
“The Strategic Samaritan: How Effectiveness and Proximity Affect Corporate Responses to External Crises.” Business Ethics Quarterly 22(4): 621–649.
Coworkers can make us crazy. Here’s how to handle tough situations.
Plus: Four questions to consider before becoming a social-impact entrepreneur.
Finding and nurturing high performers isn’t easy, but it pays off.
A Broadway songwriter and a marketing professor discuss the connection between our favorite tunes and how they make us feel.