By Garett Robertson and Tadeus Dobrovolskij
While the primary goal of corporations is to make money, they are not without accountability to society at large. They have both the ability to influence and be influenced by societal problems and challenges making their voice a necessary part of the dialogue and engagement that shapes laws, rules, institutions and other cultural conditions. Many corporations would think that their involvement is limited to merely paying taxes, but this is not the case. If taxes were enough, then government would have the perfect solution to every problem and challenge that societies will ever face. This is obviously not the case however. Corporations must, therefore, take an active role in socially impactful problems lest they neglect their responsibility as stakeholders in society becoming free riders whose only contribution is one of omission that perpetuates problems and acquiesces to inefficiency.
Morality aside, raison d’être of a business is to make money. With money in mind, executives and shareholders may wonder, whether it makes any sense to pursue social impact at all. Not all corporations are directly responsible for societal failings afterall. Moreover, committing resources to socially impactful solutions could have the unintended consequence of jeopardizing value creation and harming the company. What could be the reasons then for purely rational executives to pursue societal solutions and invest in corporate social responsibility (CSR) initiatives?
Let’s take a look at this question from a pragmatic viewpoint and analyze the effects of CSR from different stakeholder groups’ perspective.
If there was a clear positive relationship between CSR and corporate financial performance, there would be no shareholder vs stakeholder debate that has captured the minds of economists, managers and many others for decades. As you could imagine, in that case both theories would converge and there would be no difference between them.
Instead, all research on this topic is inconclusive reinforcing the debate. There is no statistically significant linear dependency between profits and CSR, there is no share crash risk mitigation, and there is no relationship between the announcement of CSR initiatives and share performance. While neither side of the debate can claim an easy victory, there are many success stories of companies and organizations, which were able to substantially reduce costs by going green. Moreover, there are business models built on the idea of business impact, like microfinance industry that is helping alleviate poverty or sustainable farming, establishing that the two sides can converge in value creating wins for everyone. It is not a zero-sum debate. Therefore, there are definitely cases when shareholders can benefit from CSR initiatives and the inconclusive research data shouldn’t discourage anyone against implementing CSR, but act as a warning for the importance of careful planning and clear strategy.
Many articles were written already about millennials and CSR. Unlike their parents, millennials tend to be more skeptical towards advertising, which results in stricter requirements for corporate authenticity. Companies trying to woo this customer segment need to walk the talk. “More than 9-in-10 millennials would switch brands to one associated with a cause” tells you everything that you need to know about millennials and CSR.
But not only Generation Y cares about the social stance of businesses. 52% of consumers are more likely to recommend a brand which supports a good cause. CSR initiatives contribute to a better evaluation of companies and greater customer loyalty.
Moreover, CSR matters not only in B2C world. Many big companies nowadays (e.g. Toshiba) audit their suppliers to ensure that the complete supply chain is perfectly aligned with social initiatives. With a growing push for greener technologies and the watchful eye of global community, certain CSR activities are required for a company to even be considered by its customers, and business leaders need to take this into account when developing new strategies. Aligning with the customer perspective then is a key value proposition that increasingly influences top line growth and pricing.
In some industries (e.g. consulting) employee turnover is expected, but for the majority of businesses hiring and retaining talent is crucial. Especially now, when unemployment is approaching the record low levels, a way to reduce employee attrition would be a strong competitive advantage. Let’s take a look what effect CSR could have on employee turnover.
According to a recent study by Hewitt Associates, CSR activities positively affect employee engagement. If you are involved in CSR, you can expect more positive comments, lower turnover and higher employee motivation. Companies looking to retain top talent need to carefully evaluate the possibility of investing in social causes.