The Dwindling Returns on Social Responsibility

CSR used to help companies stick out. Now, it’s largely table stakes
Kate Irwin
Green umbrellas and modern business architecture over Cheonggyecheon stream in Seoul, South Korea.

People want to believe that companies that do good for society also do good for their bottom line. But is this really the case? And if it was true when corporate social responsibility (CSR) was new, does it still hold true today when most organizations have a CSR strategy?

These are questions at the centre of new research that explores the evolution of CSR over a crucial period when it moved from a fringe corporate activity to a fundamental part of nearly every company. The research attempts to link corporate social performance (CSP)—the actual results of an organization’s CSR activities—to profitability, stock market valuation and corporate risk.

What did the study find?

  • Early CSR adopters were more likely to experience greater firm profitability and higher stock market valuation due to their CSR activities.

  • They also tended to take on more potential risk for being ahead of market expectations. These risks included blowback from shareholders or other stakeholders reacting to a firm’s CSR strategy. 

  • Since around 2000, as CSR became a normal part of doing business, it became a weaker driver of both firm profitability and improved stock market valuation.

  • Primary CSP (that is, oriented towards people who can directly affect the firm's performance) has become less risky. But secondary CSP (community- and environmentally-oriented activities) has seen the opposite effect, with an increase in associated risk level over time.

How was the study designed?

The study focused on 247 Standard & Poor’s 500 firms over 18 years, from 1991 to 2008. The researchers tracked the social and environmental performance of firms along seven dimensions: community relations, employee relations, product issues, corporate governance, diversity, human rights issues and environmental performance. The S&P Compustat database provided financial performance information.

What do I need to know?

The research findings demonstrate that the relationship between corporate social responsibility and financial performance is dynamic. In years past, CSR activity was a differentiator and money maker (albeit still a potentially risky play). Today, few organizations actually make money from these efforts.

But does this mean organizations should drop these activities? The researchers say no. Marketers should instead work harder to differentiate their version of CSR rather than imitate competitors.

But they should also be aware that doing so carries potential reputational risk. “Firms that exceed the expectations of the marketplace may actually become subject to legitimacy challenges and be held to higher standards of accountability,” they write, “especially with the emergence of increasingly sophisticated monitoring mechanisms and a growing number of watchdog organizations.”

These risks may not be existential in nature but they still should be managed. For organizations, the classic rules apply: understand likely outcomes depending on conditions and track those outcomes with the right metrics.

The big message from this study is that any firm trying to justify its CSR strategy on the basis of short- or long-term financial returns may want to reconsider. A better approach may be to view CSR investments as the price for being a player in civil society.

Previous research by one of this study’s authors, Jacob Brower of Smith School of Business, showed that organizations should commit to at least five years of a consistent CSR program to reap the benefits. Social responsibility dilettantes can end up doing more damage to their bottom line than good.

TitleAn Institutional Theory Approach to the Evolution of the Corporate Social Performance – Corporate Financial Performance Relationship
AuthorsJacob Brower (Smith School of Business, Queen’s University), Peter A. Dacin (Smith School of Business, Queen’s University)
PublishedJournal of Management Studies (vol. 57, issue 4, 805-836)

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