Corporate social responsibility has been a buzzword for a while. And it’s not hard to see how communities stand to benefit when firms are serious about CSR—be it by participating in a clean water campaign or having a large philanthropic presence. But what about the firms themselves? How does doing good affect their bottom line? Here, Kellogg faculty share research and perspectives on how companies can also benefit from engaging in socially responsible activities.
To start with, how do investors react when a company directs its resources toward CSR programs? The answer has less to do with the CSR initiatives themselves than previously thought, according to research from professor emeritus Thomas Lys and assistant professor James Naughton, both of the accounting information and management department, as well as Clare Wang, who was at Kellogg when the research was conducted and is now at the University of Iowa.
Instead, when a company devotes resources to a CSR program, it sends a signal to investors about the overall health and financial performance of the company. Specifically, companies whose CSR spending exceeds investor expectations experience positive stock returns. The opposite is true if the CSR spending is less than investors had expected, the researchers find. And this investor response occurs despite the fact that, as the research found, overall, CSR expenditures do not generate a return on investment, so in isolation, they would be expected to reduce shareholder value.
So what is at work? The researchers explain that when investors see a firm withhold or devote resources to CSR initiatives, they infer that its executives are acting on private information about the future earnings and cash flows of the firm. In other words, CSR is what “rich” companies do.
Most research examining the effects of CSR—and in particular, environmentally friendly activities— has focused on company stock price. Operations professor Sunil Chopra chose a different angle. He and a co-author analyzed how eco-activities affect companies’ operating performance—a range of measures that include costs, revenues, margins, and profits.
They used a database of press releases to identify companies in the computer and electronics industry that announced an eco-activity between 2000 and 2011 and that had publically available financial data. Then they paired each company with a control firm that did not initiate eco-friendly practices but was similar across a variety of other factors. When the researchers analyzed the operating performance of companies for two years prior to the announcement and two years following it, they found that, overall, eco-activities paid off: companies that pursued them performed better than those that did not, and the difference was especially striking in the second year following the announcement.
The biggest long-term benefit went to companies that engaged in activities that were more complex, such as those that followed the directives of a standard-setting organization like LEED or required collaboration with other companies. For example, Hewlett-Packard adopted new technology from Citrix Systems designed to lower the consumption of power and cooling resources in computer servers. “If you’re just doing something like changing the light bulbs, that’s simple and has an immediate benefit,” Chopra says. “But collaborations often involve other parts of the supply chain. They’re more complex, and they require an initial investment. But they do seem to pay off.”
Read more at Kellogg Insight