The Big Pay Off Of Corporate Social Responsibility

To survive in today’s economy, businesses need to demonstrate corporate social responsibility.

With companies growing larger in power and money, Ioannis Ioannou, an associate professor of strategy and entrepreneurship, argues in a London Business School article that modern organizations companies don’t only benefit society when they demonstrate CSR. They benefit themselves.

The Modern Day Organization

Corporations have largely grown over the years. Some companies have grown so large, that they account for larger economies than some countries. According to a 2016 Global Justice Now study, out of the world’s top 100 largest economies, 69 were companies while 31 were countries.

With more power than some governments, the world’s top 10 corporations make enough revenue together than 180 of the poorest countries combined, Ioannou says.

“The modern organization’s large footprint highlights its potential to have a positive impact on society and the environment if the right incentives, motives, institutions and people are in place,” Ioannou writes. “Just think about the positive impact that one company, such as Unilever, could have when it focuses on making sustainable living commonplace. This is a company whose products and services reach up to two billion people daily.”

Being Socially Responsible Pays Off

Financial performance for a company, Ioannou argues, is directly linked to its social responsibility today.

“In other words, companies perform better when making a positive contribution towards sustainable and inclusive growth as they gain better access to human capital and finance and benefit from increased customer loyalty,” Iouannou explains.

This relationship between CSR and financial performance was not always the case, however. Ioannou explains how in the early 1990’s, the general public and business figures believed that investors were “indifferent about whether companies engaged in CSR initiatives.”

Investment analysts’ perceptions have largely changed since then, Ioannou argues. Many investors tend to now see a company’s CSR initiatives as valuable. In his studies, Ioannou found that “companies with superior sustainability performance gained better access to finance. They faced lower capital constraints, simply because they were more transparent, and had more stable relationships with their stakeholders.”

The Benefits of Socially Responsible Business

In the investment world, the practice of socially responsible investing is called “ESG (environmental, social and governance) investing,” according to Forbes.

And this practice tends to pay off well for stakeholders. But there are a number of other benefits a company gains in being socially responsible, Ioannou argues.

Companies heavily involved in CSR tend to be characterized by distinct governance mechanisms, Ioannou says. In other words – they tend to reflect the joint interests of all their stakeholders.

“Such companies involve the board more in CSR issues and link executive compensation to environmental and social objectives (in addition to financial objectives),” Ioannou writes.

In turn, there tends to be a better understanding of stakeholders’ needs since they are more directly involved and linked.

“They report internally and externally on the quality of those partnerships, making them more proactive, transparent and accountable when engaging with their stakeholders,” Ioannou writes.

Lastly, Ioannou argues that being socially responsible can make a company “more likely to measure information related to key stakeholders such as employees, customers and suppliers, and to increase the credibility of these measures by using auditing procedures.”

Additionally, companies that care about social responsibility tend to measure and disclose more and higher quality non-financial data.

All of this may seem to convey that companies largely choose to be socially responsible because it offers better financial gains. So, as a consumer, where would you fit in?

Amit Bhattacharjee, an assistant professor of marketing at the Rotterdam School of Management, says consumers influence companies with their dollars.

“Relative to the scale and financial might of big businesses, individual consumers may feel powerless and devoid of influence,” Bhattacharjee writes in a Harvard Business Review post. “They may need reminders of their enormous collective power and influence. Their dollars are votes that directly shape what businesses must do to survive, and those votes add up.”

Sources: London Business School, Harvard Business Review, Global Justice Now