The Impact of Corporate Social Responsbility - from Creating Customer Goodwill to Influencing Social Standards

by on 5 December, 2008 - 02:05

by: Idris Mootee

CSR is still not a mainstream thing and there isn’t any standard definition. People still wonder the economic logic behind it, is there a positive correlation between economical performance and CSR or social standards can be a sustainable basis for the diffusion of the latter. But, very often, social standards have a positive impact on the profit only in the long term and only in a very diffuse way. For a wide range of social standards it is almost impossible to maintain that their implementation has a direct positive impact on the profit of large corporations.

Although it might be difficult to establish a clear correlation between the implementation of social standards and profit making, corporations could aim at raising their reputation by implementing social standards, in order to possibly gain profits - or at least not to make losses- from this reputation, at a later point in time.

Let’s be clear there are 2 types of CSR. CSR as marketing tool (BP) and CSR as part of a business strategy (Patagonia). BP’s marketing campaign, which is all about looking for alternative energy sources, makes the consuming public feel good about purchasing BP products. But if BP had redeployed billions of dollars into environmental investments that yielded no profits, and its stock plummeted, one would certainly expect investor to dump their stocks. And if they don't invest in alternative energy as they promised on the adv, they will lose credibility with the public, but does it hurt their profits? Is the credibility of a n oil company important?

Let’s try to challenge the idea of corporate social responsibility, while it is absolutely reasonable to expect that corporations should be “responsible” such as by creating quality products and marketing them in an ethical manner, ensuring they are trading fairly with their third world suppliers, operating in compliance with laws and regulations and treating minority shareholders and investors fairly. But the notion that the corporation should apply its assets for social purposes, rather than for the profit of its owners, the shareholders, is irresponsible. This is where the challenge is.

B-School 101, a corporation’s goal is to maximize shareholder value return. They can use solar power for the offices or sponsor local charities. But it would be irresponsible for the management of a company, whose stock these investors purchased, to deploy corporate resources for social causes. Here is a litmus test of the market for corporate social responsibility. For example, Nike could sell a pair of sneakers for $90 and another for $120 with the extra $35 goes to promote a cause or provide micro lending etc. This is using the market to decide what’s best. (The problem should that $30 goes to Nike profit instead and $5 goes to a chairty?)

If consumers wanted to pay the extra $35, voting with their wallets for a cause they believe in, they could. I don’ think this works. Consumers want to contribute, but want the freedom to decide and want to make it personalize. Otherwise it is called a tax. Consumer wants to have way to decide, socialize and sometimes exhibit their causes, individually and not through corporations. They certainly do not expect the for-profit corporations in which they invest to deploy corporate assets for social causes unless it helps with business performance.

Management’s job is to invest in projects that drive growth, profitability, innovation, and anything else that drives the shareholders’ return. The question what if the project creates a second or third bottom-line and as a result slightly reduce ROE? It is not easy to make these calls. I think the line between using CSR as a marketing tool and as part of a business strategy will blur, companies will slowly realize it is absolutely essential for them to practice CSR in order to win the hearts and minds of customers and employees. Making a great product won't do the job anymore.

Original Post: http://mootee.typepad.com/innovation_playground/2008/12/the-impact-of-corporate-social-responsbility-from-creating-customer-goodwill-to-influencing-social-s.html