Failure to tie CSR initiatives to clear business strategies often undermines their effectiveness in creating value
Lack of strategic planning typically prevents companies from creating economic value through their corporate social responsibility (CSR) efforts and often even destroys it, according to a new study. As CSR becomes prevalent, education of executives on how best to plan CSR efforts will be a deciding factor in whether they succeed or fail, the study says.
'The underlying idea is that corporations can better achieve their business objectives by acting more responsibly,' according to the study by Northwestern University professor Daniel Diermeier, as published in The Conference Board’s Directors Notes. 'Mounting evidence, however, suggests that, on average, CSR initiatives may fail to create economic value or even destroy it.'
CSR campaigns, the research says, are more likely to create value when employed in one of three areas: preventing reputation damage, easing regulatory risks and speaking to stakeholders’ sense of virtue.
'To make CSR a value-generating strategy, executives must understand the contexts in which responsible practices are more likely to pay off and implement the practices with specific principles in mind,' the study notes.
Among the most effective ways to apply a CSR strategy is to promote responsible practices, particularly in relation to the environment, according to the study. A CSR campaign in this area is not meant to improve operational efficiencies, but to pre-empt negative attention from environmentalists, the media, courts, politicians and others. By communicating their values in this way, companies create 'rules of the game' that 'go well beyond formal regulations.'
An example of an effective CSR campaign in this area followed the factory collapse in Bangladesh in April that killed more than 1,100 people and highlighted working conditions in factories often associated with exports and brand names.
After the disaster, about 50 major clothing retailers, including H&M, PVH, and Abercrombie & Fitch, voluntarily signed a legally binding agreement, consented to by local workers, aimed at carrying out mandatory inspections and public disclosure, as well as prompting infrastructure repairs and upgrades.
Research shows that companies with strong records of responsible practices lost $600 million less in market value than peers with limited CSR activities when facing product recalls, according to the study. 'In general, responsible companies earn such rewards not so much because investors value their CSR practices specifically, but because they are seen as less likely to be punished for breaching implicit social contracts related to ethical behavior.'
A second fruitful area for CSR efforts is within operations, Diermeier says. These efforts can deliver a win-win situation by cutting costs and increasing profit while demonstrably benefiting the environment.
One example is British Petroleum's (BP) creation in the 1990s of an emissions trading scheme and a greenhouse emissions cap that, according to the study, generated $600 million in profit for the oil and gas company while cutting the emissions often targeted by environmentalist groups and regulators.
Any company seeking operational improvements should adopt such uncontroversial forms of CSR, which can uncover sources of value creation that executives might otherwise miss, the study says.
Another potentially productive CSR focal area is what the report calls the 'market for virtue.' Ben & Jerry’s, the Body Shop (acquired by L'Oreal), and Whole Foods are examples of companies that stress moral considerations in promoting themselves.
'In this arena, companies 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,' the study says. This 'requires the presence of sufficient demand for virtue or an adequate number of customers willing to buy products that fulfill certain moral principles, offsetting the additional costs of providing such products.'
However, this is an area that is also likely to destroy value, the study warns. Competitors can imitate a socially responsible brand, weakening its value. It’s also often difficult to tell whether such a campaign is boosting sales beyond the price or volume that would have been achievable without it.
Charitable contributions in response to natural disasters provide another opportunity to bolster corporate reputations through CSR. But such actions should be seen as authentic and lacking a profit motive. They should also be handled competently to ensure the charity is actually helping the victims.
With executives under increasing pressure to demonstrate social responsibility, success is more likely if they undertake all CSR efforts with a specific business strategy in mind. The corporate side of CSR must have the same weight as the social side, the study suggests.
