Professor of Strategy and Entrepreneurship
London Business School

Corporate Social Responsibility – nice, but does it earn you any money?

The question “should corporations actively invest in socially responsible stuff, or should they simply focus on making money?” continues to linger and re-emerge on the business agenda (especially, it seems, around the time that business-minds receive the call to once more swarm to Davos).

People are then quick to shout “but they are not two different things; behaving in a socially responsible way will, in the long run, also make you better off financially!” but, in spite of the latest tally of 225 academic studies trying to provide hard evidence of the existence of that relationship, proof of that statement is unfortunately actually pretty hard to find…

And I say “unfortunately” because it would of course be nice if the socially responsible companies would also get financially rewarded for their honorable endeavors. But it is hard to provide solid evidence for that. For example, although we do know from research that socially responsible companies are usually the better-performers, the tricky thing is that, as we say, the causality often seems to run the other way around; once firms are beginning to make a healthy profit, they start acting in socially responsible ways. If losses pile up, the responsible stuff is the first to go out of the door. Hence, socially responsible behavior does not make you a better performer; good financial performance leads firms to behave in more responsible ways. It seems it is a bit of a luxury product that we only indulge in if we feel we can afford it.

However, on the bright side, there is certainly no evidence that firms acting in socially responsible ways perform more poorly as a result! So, if it doesn’t cost you anything, why not do it?! Yep, you will have to spend a bit more money, not using suppliers that employ children to produce their stuff, recycling your toxics although you could have had it legally dumped somewhere else, and invest in some services for your local community and the family of your employees although you could have told them to bugger off and take care of themselves. However, these niceties may also appeal to your customers, to green investors, will make you more attractive as an employer, and so on. And apparently these costs and benefits seem to largely average out so at least there seems no reason not to be a good guy!

However, it would still be nice if the socially responsible types were actually better off would’t it…

Professors Paul Godfrey, Craig Merrill, and Jared Hansen, from Brigham Young University and the University of North Carolina, came up with a clever insight why the socially responsible types may be better off after all. They didn’t just look at the social and financial performance of all sorts of companies but they decided to specifically focus on companies that got into trouble because some negative event had happened to them. This could be the initiation of a lawsuit against the firm (e.g. by a customer), the announcement of regulatory action (e.g. fines, penalties) by a government entity, and so on. Then they measured what happened to the share price of the company as result of the event. And the interesting thing was that how much you were punished by the stock market for the negative news depended very much on how much of a socially responsible company you were.

Firms that scored low on a social responsibility index saw their share price plummet if they had to announce a negative event. Firms with very good social track records did not see their share price go down that much. Paul, Craig, and Jared concluded that, apparently, your socially responsible reputation acts as some sort of an insurance; when something bad happens to you (in the form of a serious customer complaint or a government fine) investors conclude that you probably made a genuine mistake, and that you will definitely do better next time, and that there is nothing structurally wrong with you or to worry about. However, when you are much more of a social villain, the stock market washes its hands of you, drops its financial support, and makes your share price plummet.

Thus, good guys are better off after all. And the dollars you spent on being socially responsible do pay themselves back and turn into profit, especially when you are in a rot.

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