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.

Who to turn to in a downturn? Insights from top performers in meagre times

Of course I get asked quite a lot, lately, is there any research on firm strategies in a downturn? And I have to say, the answer is (unfortunately) pretty much “no”.

There is a lot of research in the field of strategy on companies that are in trouble. There is also quite a lot of stuff on companies that operate in industries that are in decline, for instance because their business model is antiquated or their technology has been surpassed. But there is nothing, to the best of my knowledge, on what corporate strategy to follow if the whole planet is in decline…

Someone also asked me, the other day, do you know of any companies that do particularly well in a downturn? And actually, I realised, that’s not a bad place to start. I mean, perhaps we can learn something from these businesses; in terms of insights that other companies can also apply in their attempts to weather the storm. So let me give it a try. I am going to – quite cowardly – not present these deliberations in the form of insights or findings but in the form of questions. Questions you can ask yourself, as a company, to try to think of ways to improve your chances of survival whilst the world is in a downturn.

Be Morrisons (not Waitrose)

The first, fairly obvious, type of business that does relatively well in a downturn are the ones that offer products or services at comparatively low costs. Their price-quality ratio is low, relative to their direct competitors. For example, supermarkets like Morrisons, which compete on price, are currently showing much better numbers than a more upmarket quality provider like Waitrose. These companies always provided that type of price-quality ratio but now more and more customers put higher weight on the price aspect of the ratio, which makes Morrisons flourish.

It seems quite obvious but, nevertheless, it is worth thinking about. Is there anything you can do to offer your (potential) customers lower cost options (probably at the expense of some quality)? I am often a bit surprised by how reluctant businesses are to give up margin when times are tough. It seems many firms think they can’t afford to lower their margins because that’s the remaining source of income while customers are deserting them. However, fewer customers may desert you if you do lower your margins! You may even win a few. Moreover, many customers are willing to sacrifice quality for price, IF you give them the choice.

Be a shoe repair shop

But, as said, that’s the obvious one. One step further are the types of businesses that help companies extend the life of their current resources. Think of car part dealers or shoe repair shops. They actually grow during times of decline (as they are doing now)! People and companies are having their cars repaired rather than invest in a new one. Can you, as a business, think of a product or service that you can offer to help your clients get more out of their old shoes? Can you offer upgrades of existing technologies? Can you offer marketing services that extend the lifecycle of your client’s product?

Moreover, do you have clients that are like shoe repair shops and car part dealers. Or could you make them your clients and offer them something they might be interested in? After all, they can afford it, and probably could use some help handling their exceptional growth.

Be a business school

Finally, can’t you be more like a business school? Seriously. During the last (mini)crisis in 2001, for example, applications to London Business School’s full time MBA programme doubled. What better time to do an MBA then during a crisis? People figured that the opportunity cost of their time was now relatively low; it is not like you’re going to get a huge pay rise or bonus during the crisis years (unless you’re a City investment banker of course…).

Moreover, by the time that they graduate, about one and a half years later, the crisis may have largely blown over and they are in a superior position to catch the first wave. Hence, be more like London Business School; clearly that can never be bad advice.

Soft stuff (such as caring for the community and the environment), shareholder value orientation, and take-over protection mechanisms

Caring for the community and the environment, shareholder value orientation, and take-over protection mechanisms?! What do they have to do with one another?

Well, quite a bit it appears. Let me explain.

First of all, do we like it that firms can adopt take-over protection mechanisms (such as poison pill constructions)? “No we don’t!”, do shareholders proclaim in chorus. Because the threat of a potential take-over is a great way to make sure that CEOs don’t do anything that does not maximize the value for shareholders. Remove that possibility and these bloody CEOs will do all sorts of silly things that are not in our interest.

And I am afraid that is at least half true… And one of these silly things is attending to issues such as caring for the natural environment and the community. We – the wider public – may like it if corporations do that kind of stuff but it is hardly clear that shareholders do; after all, caring for such soft stuff comes at the cost of the hard stuff: cash.

Aleksandra Kacperczyck, from the University of Michigan, examined this issue in a clever way. She examined 878 public firms in Delaware between 1991 and 2002. The interesting thing about Delaware is that in the mid 1990s, due to a series of court decisions, hostile take-overs suddenly became a lot more difficult. And what Aleksandra found is that, after that fact, Delaware companies started to pay a lot more attention to catering to the community and to the natural environment. All of a sudden, it was safe for companies to do such stuff, without the threat hanging over them that they could get “punished” for it by means of some hostile take-over by another company that thought it could make more money by getting rid of all that expensive soft stuff.

Did shareholders like it? Well, they didn’t applaud the court decisions (to say the least) and the fact that now corporations could divert valuable cash to such silly things, but they had to grind their teeth and grudgingly accept it.

But were they right; that it was going to cost them money? Well, not exactly.

Aleksandra also measured what happened to the long-term shareholder value of the corporations that started to engage in the fluffy “caring for the environment and community" kinda stuff. Shareholder value actually went up! The long term market-to-book ratio of these firms started to rise as a result of these fluffy actions! The shareholders, in spite of their doubts and grudges, were better off.

A classic win-win situation appeared; having been freed from the threat of hostile take-overs enabled the firms in Delaware to do nice things for the community and the environment, which actually paid off in terms of hard cash in the long run. But there was one catch…

In a brainwave, Aleksandra decided to also look at what happened to the levels of executive compensation (in the form of salary, bonuses, and other annual remuneration perks) of the companies that found themselves shielded from the threat of hostile takeover; CEO remuneration went up… Apparently, now immune to takeover threats, top executives not only started attending more freely to the interest of the wider community but also to their own private interests. They let others share in the wealth, but didn’t forget themselves either…