No one wants to be considered irresponsible, and the same could be said for corporate entities. After Enron, Tyco, Parmalat, and a whole host of corporate and executive scandals, the principles surrounding corporate governance and business purpose were questioned regarding responsibilities. The outcome: increased control, monitoring, and heightened attention on responsibility.
Hence, it stands to reason why there has been an increase in the adoption of corporate social responsibility (CSR) strategies. However, doing good for the sake of doing good is a notable position, but there is more behind this trend than meets the eye. Just have a look at the increased number of screened funds and the considerable amount of recognition CSR has received in both practice and academia. In fact, research now identifies a positive correlation between social and financial performance, and there appears to be an association between firms that are considered socially responsible and institutional investors. In other words, CSR is not just philanthropy. Doing good can actually add value to the firm.
“If you didn’t think that the CSR was going to pay off in financial terms then we wouldn’t call that good management. In cases where you do buy into it, then yes I would call that good management.”
In light of this trend, we decided to explore the minds of some of the decision makers responsible for the integration of social responsibility in their respective companies and the institutional investors who held shares in these companies. Utilizing cognitive modeling, we uncovered just how CSR was perceived internally in the firm, externally from an institutional investor’s perspective, and whether CSR was perceived as adding value to these organizations.
The organizations we assessed were from the oil and gas industry and positioned their firms as socially responsible in their respective markets. Although the cost of social responsibility was approximately 3 percent of their net profits, these firms were much more intentional in their investments. When we say that CSR was not philanthropy, we mean that the activities the organization engaged in went beyond charity. The social and/or environmental investments were strategic. They were instrumental in their business model and actually reflected the identity of the organization. Something window dressing is unable to accomplish.
“I am not sure you can evaluate its worth on a total dollar basis. I think the easiest way to value it is on the downside risk that you are protecting against.” Senior executive
This is what we uncovered. According to the senior executives and institutional investor’s of these firms, corporate social responsibility was found to add value on several fronts. First, the most obvious was risk mitigation. An effective investment minimized the firm’s exposure. Having CSR up front, not only reduced the likelihood of neglect or irresponsible behavior but also had the potential to add tangible short-term benefits. One firm in our study invested heavily into the health and education of some of the communities surrounding its operations. It operated in some of the most volatile regions of the world. Although this investment was aimed at helping disparate people, the firm immediately realized a net benefit. With kidnappings so prominent in this part of the world, employees found themselves being shielded from the guerrillas. The communities in which they operated began looking out for the employees just as neighbors would look out for each other. This unexpected outcome was so good that the firm eventually declined purchasing kidnap and ransom insurance, an unthinkable proposition in this part of the world.
“I would say in the most straightforward way it is to their advantage to both be and be perceived to be socially responsible because if they are known to be that then it makes it easier for them to be in territories that they want to be in and find easier access to markets.” Investor/Analyst
A second net benefit from CSR was the strategic opportunities provided to the “responsible” organization. With the industry average moving in this direction, we can’t see this alone as a sustainable competitive advantage over the long term. However, initially, the leaders and investors of these firms believed that they were considered preferred providers of their respective services because of their reputation and practice. Of course, this trend also suggests that firms that do not start taking action on adopting CSR will eventually be behind industry average and must then start playing catch-up.
“And it is to distinguish us from others. When we start to think through the shareholder value elements, we have a unique business model and our sustainability related identity does put us in a different box than our peers. We are not just your typical oil and gas firm. We are trying to appeal to investors.” Senior executive
Third, and related to the second, are the benefits derived from the capital markets. In particular, these firms attracted a “type” of investor and as research suggests, institutional investors appear to favor socially responsible firms. The benefits they realized was a reduction in the volatility of their stock price and owners who are in for the long haul, not the short gain. There was even the belief that a diversity of shareholders was preferred and that having CSR or sustainable development up front allowed them a favorable look by European institutional investors, access to the Dow Jones Sustainability Index or CERES, and many other capital markets favoring this strategic positioning.
“Because you get a reputation for the style of business that you do, you tend to attract some pretty good people who like that style of business (socially responsible). That tends to strengthen what you have got … our human resources group says that our turnover is probably one of the lowest.” Senior executive
Fourth, CSR was an indicator of managerial and employee excellence. The latter component is well supported in the literature. Employees prefer working for an organization that is not only well respected in the neighborhood but also works with communities to make life better. These firms, and their respective investors, boasted of having employees that were the best of the best and the lowest turnover in the industry. Today’s CSR is more than charity. Strategically, investments must line up with the firm’s competences and capabilities. Employee involvement and holistic corporate participation is what makes a difference both in the firm’s reputation as a socially responsible organization and employee satisfaction. Employee productivity does not appear to be sacrificed if the investment is done properly. One firm paid employees to engage in community work such as coaching a local team, or working with a shelter or the United Way. Not only did management believe their people were recharged and much more productive, but even institutional investors were also well aware of the practice and even more so with the firm’s above-average performance.
“One of the indicators of a well-managed company is you manage your environment and your sustainable development issues well.” Senior executive
With respect to CSR as an indicator of managerial competence, the institutional investors in our study could neither support nor deny this factor. However, recent literature is supportive. Scholars are drawing attention to managerial competence with CSR. If social or environmental investments are good for the company and good for the environment and people, then, of course, a competent manager would make such an investment. However, just like strategy, the challenge is where to invest. This is not an easy task. Many firms are finding out that self-declaration of CSR is not sufficient. Stakeholders are the ones to attribute the title of citizenship. Hence, it is the innovative strategist/manager who makes the win-win investment that accomplishes both the CSR attribute and adds value to his or her firm and society. This is where a successful CSR initiative indicates perhaps not only managerial competence but superiority.
What Can You Do?
So, where does your firm stand with respect to CSR? The benefits, if done properly, far outweigh the costs. And if you are not in a position to make such over-arching decisions, you can still make a difference within your sphere of influence. A well-known strategist/post-professor of strategy once claimed that revolutions rarely start at the top, and you wouldn’t see the Queen of England at the front of Buckingham Palace picketing to bring down the monarchy. Rather, change often starts with the individual and there are a multitude of opportunities to not only be responsible but also competent.