Investments in Corporate Social Responsibility (CSR): Does it pay to be good?

By Vlachos Pavlos A.,Assistant Professor of Marketing

The notion of CSR

Corporations are increasingly engaging in activities that have been traditionally considered as governmental. In the context of globally expanding markets, corporations and post-national constellations, some authors further suggest a political CSR perspective that is an “…extended model of governance with business firms contributing to global regulation and providing public goods”.

In the context of these recent discussions on the role of business in society, corporations are heavily investing in Corporate Social Responsibility (CSR) initiatives in an effort to generate perceptions of Corporate Social Performance (CSP) and consequently brand trust and reputation among stakeholders. According to a recent study, surveying 2,874 managers across 113 countries, two-thirds of respondents, view investments in CSR as a competitive necessity (up from 55% in last year’s survey), with another 68% upping their CSR commitments.  Similarly, since the year 2000 more than 6,000 companies in 135 countries around the world have subscribed to the United Nations Global Compact’s CSR principles.

The Debate over CSR

Nevertheless, in light of the current world economic crisis CSR is a topic of hot debate in today’s business agenda. CSR proponents view CSR as a mechanism that corporations should use in order to gain social legitimacy for their operations, further advocating its positive effects on corporate performance. For example, a meta-analysis by Orlitzky, Schmidt, & Rynes (2003), considered 52 studies and concluded that a positive relationship between CSR and corporate performance exists. In a more recent meta-analysis of 167 studies Margolis, Elfenbein, & Walsh (2007) showed that the effect of CSR on corporate performance is positive, yet small. These authors conclude that firms should be involved in CSR, and that a continued search a business case for CSR is not warranted.

On the other hand, along with the rise of CSR initiatives, there have been a growing number of scornful voices. Opponents of CSR suggest that the promise of CSR can deflect public attention from the need for stricter laws and regulations. According to the Friedmanisque view of CSR, shareholders entrust managers with their money solely to maximize a company’s market value, not so that managers can use the returns in order to satisfy their urge to make the world a better place.

Should Firms Invest in CSR?

Firms should move away from the long-fought battle regarding the universal impact of CSR toward a finer-grained understanding of when CSR is likely to be more profitable.Managers should understand that the so-called “good-will” refund of CSR is not unconditional. For example, recent findings in the literature indicate that the positive impact of CSR on financial and market indexes (e.g., firm-idiosyncratic risk, the market value of the firm) is greater in firms with higher advertising and R&D spending.

Recent findings from ALBA Faculty research further support the idea of the conditional effect of CSR. Specifically:

1) ALBA research shows that companies that score low in service quality perceptions are disadvantaged when designing and implementing CSR actions. CSR actions by a high service quality corporation will have greater positive impact on its business goals than CSR actions of a low service quality firm, since in the high service quality firm, negative CSR-induced attributions (i.e., perceived motives) that hurt outcomes are tempered.

2) ALBA research shows that retailers targeting at consumer groups high in altruism, high in need for activity, and high in self-enhancement motives, are probably in a more advantageous position when investing in CSR initiatives as a way to build and further deepen emotional attachment, and indirectly consumer loyalty. Put simply, findings indicate that social actions are more likely to be effective for retailers positioned along the three traits/needs described earlier. For example, more upscale retailers (e.g., Waitrose, Sainsbury’s, Neiman Marcus, AB Vasillopoulos, Nordstrom etc.) will probably reap more consumer-based benefits from CSR investments compared to downscale retailers.

3) ALBA research shows that CSR can be used as a powerful human resource management device, but again these effects are likely to be moderated by contextual variables. Particularly, ALBA research finds that in order for CSR to pay-off (i.e., trigger positive employee behaviors) managers need to carefully invest in carefully designing CSR initiatives in ways that will primarily signal values-driven/intrinsic-motives to employees (e.g., through high organization-cause fit). In all, internal communication vehicles (e.g., newsletters, emails, announcements, corporate events, and web site) all need to work together toward enhancing organizational image as a socially/environmentally responsible company with genuine motives. Importantly, these positive effects are likely to be strengthened when employees’ scores on construed CSR perceptions (i.e., employees’ beliefs/readings about how outsiders view the organization in terms of its engagement with social issues) are high. Therefore, managers can use external communication vehicles in order to help the organization influence employee-own and -construed CSR perceptions. For example, in an effort to influence employees’ construed customer perceptions, organizations can share information with employees showing that past advertising campaigns have been effective in communicating to customers the social performance of the organization. CSR-related advertising content targeted at external groups (i.e. customers), can be creatively adapted to target employees as well in order to favorably influence their CSR-induced construed perceptions.

4) ALBA research shows the role of middle management leaders in the CSR-transfer process across organizational levels. Importantly, this positive spillover effect backfires when leaders score high on directive leadership characteristics. Specifically, when the leader has a directive leadership style, then efforts to communicate to employees that the company is socially responsible is probably not a good idea, since it seems that a directive leadership style inhibits the transfer of beliefs across the organizational hierarchy.