Doing well by doing good

Sustainability reporting, carbon metrics, ethical supply chains… just about every organisation has embraced the concept of corporate social responsibility (CSR) in one form or another. Hence the popular saying – “doing well, by doing good”. But, while the widespread interest in CSR may be good for society, is it really good for shareholders?

In their Management Science paper, ‘The Impact of Corporate Social Responsibility on Firm Value: The Role of Customer Awareness’, Dr Henri Servaes, from London Business School, and Dr Ane Tamayo, from the London School of Economics, look at the relationship between CSR activities and firm value. In particular, they examine the connection between enhancing value and awareness of an organisation’s CSR activities.

The jury is out on the benefits of CSR to companies, note the authors. While some research supports the notion that CSR activities lead to better profits, many studies suggest the opposite. CSR itself is, as Servaes and Tamayo admit, a poorly defined concept. For research purposes, the authors adopt the World Business Council for Sustainable Development’s CSR definition: “The commitment of a business to contribute to sustainable economic development, working with employees, their families, the local community and society at large to improve their quality of life.”

To investigate the CSR-profits link the authors looked at historic data on CSR activities and firm performance. At the same time, they reasoned that if CSR was to maximise a firm’s value – by increasing demand for products or services, for example – the consumer would need to be aware of that company’s CSR work. So the authors also focused on consumer awareness of a company’s activities, using advertising spend as a proxy for CSR awareness. More advertising means more press coverage means greater awareness. Greater awareness reduces the information gap between consumer and company.

The consumer learns more about a company’s CSR activities, and might then reward the firm for its CSR involvement.  The good news for shareholders – and CSR managers and advertising agencies – is that CSR activities can add value to companies, but only in certain conditions. The research showed that, where advertising leads to increased public awareness of a firm’s activities, CSR initiatives can enhance value. Whereas firms with low public awareness gain little or no value from their CSR efforts; if they want to add value they will need to up their ad spend.

But increased awareness is not good news for all firms. For some organisations, the costs of being socially responsible outweigh the benefits to the shareholders – if not to other stakeholders. For firms with a poor CSR record or reputation, additional scrutiny can have a negative impact on value. The same is true for firms that indulge in a spot of greenwashing; where CSR reputation and reality don’t match up.

Some firms will be happy to engage in CSR activities, regardless of gain, because they think it is the right thing to do. But for those firms looking to “do well, by doing good”, to help the planet and boost profits, there is no point doing great CSR work and being modest about it – tell everyone.

Resources

H Servaes and A Tamayo, 'The Impact of Corporate Social Responsibility on Firm Value: The Role of Customer Awareness' (Management Science 59, 1045-1061, 2013)