What is the real value of corporate social responsibility and can firms do better
A lot has been written about whether CSR initiatives have a positive or negative effect on company performance. But much less has been said about the actual value of CSR activities from society’s perspective. Do social responsibility initiatives actually live up to their name, and create a positive impact on society? Or are they too often symbolic hype and ‘greenwash’.
New research by Michigan Ross Professors Jun Li and Andrew Wu, the first study to systematically examine the broad societal impact of CSR engagements, offers valuable insights around the relationship between CSR and corporate ownership, shows why business leaders need to focus more on outcomes rather than on the PR aspect CSR, and carries significant implications for all stakeholders.
Research has shown how engagement in CSR can benefit business performance by encouraging new customer acquisition, enhanced customer loyalty, and stronger brand recognition. However, the cynical view is that many firms publicise CSR solely to reap the financial benefits that come from such a public commitment, regardless of the social benefits. Consequently, CSR activities fall short of their full potential societal impact, because helping society was not really the firm’s strategic objective to begin with.
Getting to the bottom of this is difficult because measuring the impact of CSR on society can be an extremely uncertain task. However, using an events-based methodology, the researchers at Michigan Ross have come up with some convincing findings across a broad array of environmental, social, and corporate governance issues.
They found that results differ significantly by corporate ownership type. Privately owned firms do much better than publicly traded firms, and ruling out several alternative explanations, the study suggests this dichotomy can be attributed to conflicts of interest between shareholders and stakeholders, which is more pronounced in public firms than private firms.
Commenting on why private companies are significantly more likely to follow through on their CSR promises than public companies, Professor Li says:
“There do seem to be conflicts for public companies when it comes to corporate social responsibility. They are constrained by shareholders and by law to maximize profits. If the CEO of Patagonia wants to buy organic cotton, he can make it happen even if it means lower margins. A public company has to justify that to shareholders."
"If you think about corporate social responsibility, it’s mostly a diversion of resources,” says Professor Wu, “Not only from company shareholders to other stakeholders, but also from short-term to long-term. But public company managers tend to focus more on the short term and are incentivized as such.”
The exceptions they found among public companies were ones that own customer-facing brands. In those cases, the value of corporate social responsibility is aligned with shareholders, since consumers often punish companies for irresponsible behaviour.
“We segmented where companies are in the supply chain and when a company owns a brand that’s high-profile with consumers, like household products, they have better social responsibility performance,” says Li.“But with the B2B companies further down the chain you see the greenwashing.”
This research highlights why business leaders should focus on outcomes for society, if their CSR initiatives are to provide sustainable long-term benefit to the firm and to society. It also suggests why other stakeholders ― policymakers, investors, business partners, media ― should help soften the agency conflict and provide incentive for all firms to engage in substantive CSR efforts that benefit society as a whole.
Read the research paper: Does Corporate Social Responsibility Benefit Society?
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