Visibility Boosts the Impact of Social Responsibility

As attracting top talent continues to rise as a priority, with the economy recovering and business models shifting, corporate social responsibility (CSR) is increasingly viewed as a recruitment tool. This is especially the case among the millennial generation, a segment of the population projected to make up nearly half of the U.S. workforce by 2020.

Most would agree that CSR is important for every organization. But for companies whose products or brands are highly visible, strong CSR efforts can yield significant dividends.

A forthcoming study in Management Science by professors from the London Business School and London School of Economics found that for companies with high customer awareness, using advertising expenditures as a proxy, CSR and overall firm value are positively correlated. For firms with low customer awareness, the relation is either negative or insignificant.

This means that organizations that heavily advertise products or brands are more likely to gain positive financial value from their CSR efforts, said Henri Servaes, a professor of finance and corporate governance at the London Business School.

“For CSR to be valued by customers, by consumers, they need to know about it,” he said. “And advertising intensity is one way that leads customers to become more informed about a firm, to find out more of what they do in terms of CSR.”

In some instances, customers may even be willing to pay a premium for a product if they learn of a company’s positive CSR effort, Servaes said other studies have shown.

The study comes amid heightened attention to CSR after the April 24 collapse of a garment factory in Bangladesh killed more than 1,100 people, prompting labor groups to question if working conditions at the factory and others like it are up to standard. Many U.S.-based brands, such as Gap Inc. and Wal-Mart Stores Inc., rely on Bangladesh to produce clothing cheaply, according to published reports.

Servaes and his co-author, Ane Tamayo from the London School of Economics, analyzed two databases to determine their findings.

The first database came from KLD Research & Analytics Inc., a Boston-based research firm that specializes in tracking firms’ CSR activities. The authors looked at KLD data from 1991-2005. The second database came from Compustat, which contains financial accounting data for nearly all publicly listed U.S. companies.

By tracking firms whose financial accounting data suggested they were advertising-intensive and comparing it to the KLD data, Servaes said the authors determined that heavily advertising firms “lose out” when their CSR scores are negative. For firms not deemed advertising intensive, positive CSR scores were generally insignificant in boosting financial value, the study showed. Negative CSR scores could have an effect on firm value for any company, advertising intensive or not, the study suggests.

Some, however, suggest the study — while largely valid — takes too narrow a view of the financial benefits of CSR.

Deborah Holmes, director of corporate responsibility for professional services firm Ernst & Young, said visible CSR efforts do not just have the potential to catch the attention of customers and result in more sales. CSR, she said, is also an important projection for employees.

“The most important audience for our CSR activities is not our clients,” Holmes said. “It’s our people, employees and partners.”

Holmes also argued that CSR activities can be used as a skill-building tool — for example, a CSR program can serve to increase the capability of a person the company has already invested heavily in. As a result, increasing employees’ skills through CSR programs boosts firm value by creating more productive employees.

Still, while CSR can be a major boon in many areas that determine value for a company, it is not necessarily a panacea for companies already in poor public standing, Servaes said.

“If you don’t have a good reputation as a good corporate citizen, then suddenly doing a bunch of CSR and being advertising intensive is not going to help,” Servaes said. “So those firms that have a poor reputation are not suddenly going to get rewarded because they do a bunch of CSR.”

Frank Kalman is an associate editor at Diversity Executive. He can be reached at fkalman@diversity-executive.com.