The Dos and Don’ts of Corporate Social Responsibility

Corporate Social Responsibility (CSR) — or business policies and practices that promote social good — has become something of a buzzword for business executives. In its various manifestations, CSR can refer to diversity programs, community service initiatives, charitable donations, or environmental emissions reductions. For example, Target was a major sponsor of the New York City Pride Parade this year, gaining publicity and aligning the brand with progressive values. Because these programs allow firms to generate public goodwill and increase brand recognition, CSR is increasingly an integral part of corporate strategy. Indeed, a group of Fortune 500 CEOs at the recent Business Roundtable issued a statement on the ‘Purpose of a Corporation,’ stressing the importance of creating value for all stakeholders, not just shareholders [1].

Of course, if businesses truly committed to socially responsible behavior, we would all be better off. Companies would strive to follow best practices, reduce their environmental impact, set ethical labor standards, and donate some of their resources to philanthropic causes. Unfortunately, businesses are unlikely to engage in CSR for normative reasons (i.e., because they should), but instead must be convinced to do so because of instrumental reasons (i.e., because CSR directly helps the company’s profitability).

For that reason, much academic research has been dedicated to demonstrating the instrumental impact of CSR on companies’ bottom lines [2]. These initiatives make firms more appealing to consumers — and are correlated with brand recognition, consumers’ likelihood of choosing the company, consumers’ evaluation of product quality, and customer loyalty [3][4][5][6]. CSR also improves employee outcomes: it is associated with increased employee satisfaction, organizational citizenship behavior, firm attractiveness to potential employees, and reduced employee turnover [7][8][9][10][11]. Further, CSR is positively related to firm reputation and investor sentiment, particularly with the rise of socially conscious impact investing [12][13]. Finally, there is a robust positive relationship between CSR and corporate financial performance: CSR improves companies’ bottom lines [14].

Consumers, employees, and investors have begun to deviate from traditional economic incentives like prices, wages, or returns and to incorporate information about social value like environmental sustainability, corporate culture, and business ethics into their decision making. In order to remain competitive in this changing economic culture, firms have begun touting their CSR programs, funnelling money into philanthropy or social movements, advertising their new green policies, boasting about diversity, and emphasizing their commitment to local communities.

However, some of these companies have come under fire for so-called ‘pink washing’ or ‘green washing,’ which describe business practices that are superficially LGBTQ friendly or environmentally friendly, but do not demonstrate a genuine commitment to the issues. Firms may be tempted to engage in a very shallow view of CSR to advertise socially conscious values and gain public favor while still making corporate decisions to maximize short-term shareholder value at the expense of environmental or social concerns [15]. For instance, BP launched a “Beyond Petroleum” campaign, presenting itself as an environmentally friendly energy company while simultaneously side-stepping safety regulations to save time and money; the results of these actions culminated in a major oil spill in the Gulf of Mexico.

Over the years, consumers and investors have become understandably suspicious of businesses’ CSR policies, and they respond very negatively to reports of green washing [4][16][17][18]. Watchdog agencies and demands for increased transparency are providing the public with more accurate information on CSR performance. Legal scholars have argued that consumers can claim false advertising and investors can claim security fraud to hold companies legally liable for faux-CSR actions [15]. Beyond legal action, green washing impacts consumer behavior and consequently, firm performance. Researchers have found that symbolic actions on environmental issues and a discrepancy between symbolic actions and substantive policies (ie green washing) have a negative effect on the financial performance of a company [19]. 

So, CSR has a positive effect on consumer behavior, employee engagement, and company financial performance, but companies are incentivized to advertise social values while pursuing short term profits in whatever way they can. This discrepancy between advertised values and actual behavior, when discovered by the public, has a negative effect on financial performance [17][19].

What’s Next for CSR?

If people are skeptical of CSR initiatives, is it still beneficial for firms to engage in them?

The answer is yes — if firms truly engage in CSR, are transparent about their performance, and carefully promote these policies [17]. For example, firms could publish independently audited CSR reports and comply with watchdog agencies. Companies with substantive CSR action and with transparent reporting may receive positive recognition for their policies, and at the very least will not risk being falsely accused of green washing. Additionally, companies should advertise their CSR efforts with care. Although consumers are suspicious about CSR initiatives, advertising the economic motives of CSR policies in addition to the altruistic motives — or in other words, being honest about why CSR is good for society and for business — reduces the negative effects of perceived green washing [16].  According to Illia et. al. (2013), “Corporate communications should present CSR activities as integrated into the company’s business and demonstrate that profit is not pursued without consideration for society [17].”

CSR can be a powerful tool for societal improvement by aligning business priorities with societal needs. Innovative and efficient business, driven by market forces, could generate rapid societal improvements in a way social protests, political movements, or governmental interventions could not. If companies can avoid the temptation to greenwash and can effectively communicate their actions, CSR may be a great tool to improve consumer behavior, employee engagement, and financial performance.

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