When and How to Drive Real Value with CSR
Skip to content
Social Impact Mar 4, 2013

When and How to Drive Real Value with CSR

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.

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.

Daniel Diermeier explains the recent evolution of CSR View all CSR videos on YouTube

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.

Featured Faculty

Faculty member in the Department of Managerial Economics & Decision Sciences until 2014

About the Research

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.

Read the original

Most Popular This Week
  1. How Are Black–White Biracial People Perceived in Terms of Race?
    Understanding the answer—and why black and white Americans may percieve biracial people differently—is increasingly important in a multiracial society.
    How are biracial people perceived in terms of race
  2. Don’t Wait to Be Asked: Lead
    A roadmap for increasing your influence at work.
    An employee leads by jumping from the bleachers and joining the action.
  3. How (Not) to Change Someone’s Mind
    Psychologists have found two persuasion tactics that work. But put them together and the magic is lost.
    A woman on a street talks through a large megaphone.
  4. Which Form of Government Is Best?
    Democracies may not outlast dictatorships, but they adapt better.
    Is democracy the best form of government?
  5. How Autocracies Unravel
    Over time, leaders grow more repressive and cling to yes-men—a cycle that’s playing out today in Putin’s Russia.
    autocrat leaning over battle map surrounded by yes-men.
  6. Knowing Your Boss’s Salary Can Make You Work Harder—or Slack Off
    Your level of motivation depends on whether you have a fair shot at getting promoted yourself.
    person climbin ladder with missing rungs toward rich boss surrounded by money bags on platform
  7. Sitting Near a High-Performer Can Make You Better at Your Job
    “Spillover” from certain coworkers can boost our productivity—or jeopardize our employment.
    The spillover effect in offices impacts workers in close physical proximity.
  8. It’s Performance Review Time. Which Ranking System Is Best for Your Team?
    A look at the benefits and downsides of two different approaches.
    An employee builds a staircase for his boss.
  9. Will AI Eventually Replace Doctors?
    Maybe not entirely. But the doctor–patient relationship is likely to change dramatically.
    doctors offices in small nodules
  10. Why Do Some People Succeed after Failing, While Others Continue to Flounder?
    A new study dispels some of the mystery behind success after failure.
    Scientists build a staircase from paper
  11. Four Strategies for Cultivating Strong Leaders Internally
    A retired brigadier general explains how companies can prioritize talent development.
    Companies should adopt intentional leadership strategies since developing leaders internally is critical to success.
  12. Take 5: Not So Fast!
    A little patience can lead to better ideas, stronger organizations, and more-ethical conduct at work.
  13. Too Much Cross Talk. Too Little Creativity. How to Fix the Worst Parts of a Virtual Meeting.
    Six tools from an unlikely place—improv comedy—to use on your next Zoom call.
    meeting participants improv
  14. Take 5: How to Be Prepared for Important Career Moments
    Expert advice on getting ready to network, negotiate, or make your case to the CEO.
    How to be prepared
  15. Entrepreneurship Through Acquisition Is Still Entrepreneurship
    ETA is one of the fastest-growing paths to entrepreneurship. Here's how to think about it.
    An entrepreneur strides toward a business for sale.
  16. Why Do Long Wars Happen?
    War is a highly inefficient way of dividing contested resources—yet conflicts endure when there are powerful incentives to feign strength.
    long line of soldiers marching single file through a field
  17. 5 Tips for Growing as a Leader without Burning Yourself Out
    A leadership coach and former CEO on how to take a holistic approach to your career.
    father picking up kids from school
  18. 2 Factors Will Determine How Much AI Transforms Our Economy
    They’ll also dictate how workers stand to fare.
    robot waiter serves couple in restaurant
  19. What Went Wrong at AIG?
    Unpacking the insurance giant's collapse during the 2008 financial crisis.
    What went wrong during the AIG financial crisis?
More in Business Insights Finance & Accounting