A New Study of CSR: Reading Beyond the Headline
The headline of the HBR piece is, I think, a bit misleading in that it puts a negative spin on the author's findings--as if their research had debunked the notion that CSR and profitability go together. That, of course, would be welcome news to doctrinaire supporters of pure laissez-faire economics, who believe that companies have no reason to consider social impacts when making business decisions. But the article itself suggests conclusions that are rather different from what the headline implies.
First of all, the authors say they found no conflict between doing business responsibly and achieving strong financial results. "Doing good," they say, "is unlikely to cost shareholders." Although the story downplays this finding, it is actually significant news. The assumption of most CSR skeptics--including, for example, Robert Reich, whose take on the topic I discussed here--is that there is an unavoidable conflict between profit maximization and social responsibility.
If Margolis and Elfenbein are right, the fact that no such conflict exists immediately eliminates most or all of the cited rationale behind resisting calls for social responsibility. It shifts the burden of proof from CSR advocates to their opponents: After all, if CSR is (in effect) cost-free, why not make an effort to do the right thing? What is the upside to behaving ruthlessly if it is not even rewarded in the marketplace?
Second, the authors recognize at least a modest connection between responsible business practices and strong financial performance. They note, "we found only a very small correlation between corporate behavior and good financial results." The fact that Margolis and Elfenbein do confirm such a correlation is, of course, welcome to CSR advocates. And without having access to the original study (which doesn't yet appear to be available online), it's impossible to know whether specific factors might explain why the correlation is only a small one.
For example, time may be a factor, since some of the positive effects of CSR, such as the enhancement of a company's reputation in the marketplace, would be slow to take hold. Maybe the favorable impact of CSR on profitability can only be fully observed over a period of five years or more--a factor that may or may not have been taken into account in the many studies the professors analyzed.
Third, the authors have chosen to deliberately exclude one significant element of CSR from the effects they studied. After saying that the correlation between social responsibility and profitability appears small, the authors add the following caveat: "(the exception being public misdeeds, which had a discernible negative impact)."
It's not clear to me why the authors chose to treat this as an irrelevant "exception." Isn't avoiding "public misdeeds" a major goal of CSR? If so, why shouldn't CSR "get some of the credit" for the business benefits enjoyed by companies that avoid such misdeeds, rather than having those benefits deliberately eliminated from consideration?
The authors might argue that no one, including CSR skeptics, is actually in favor of "public misdeeds," which means that the CSR movement shouldn't be credited for any positive impact from avoiding them. I'd challenge that logic. If companies that espouse CSR do a better job of avoiding scandalous behavior, that's not a mere coincidence. It's a natural outgrowth of the CSR mentality. It reflects the difference between an organization where it is understood that close ethical calls should be resolved in favor of the company and where aggressive close-to-the-line behavior is countenanced or even rewarded, and an organization where the culture dictates that close calls should be resolved in favor of customers and other stakeholders, and where actions that blur the lines between right and wrong are frowned upon or punished.
For this reason, I think the avoidance of "public misdeeds" is really part and parcel of the CSR philosophy, and should be factored into the results tallied by Margolis and Elfenbein. If this were done, it would increase the measured correlation between social responsibility and profitability, and demand a very different headline in HBR--perhaps something like, "Do Well by Doing Good? Yes, You Can."
Labels: Finance and Investment, Hillary Anger Elfenbein, Joshua D. Margolis
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By 
Mark W. McElroy, on
December 25, 2007 3:34 PM
Thanks for the comment. Your question is a good one, and it represents the logical next step after the kind of analysis performed by Margolis and Elfenbein in their study. (In my understanding of scientific theory, one would first seek to establish a clear correlation between two phenomena; then, once that has been established, one would try to test various hypotheses as to the specific mechanism by which the correlation occurs.)
For what they are worth, here are my thoughts (it would probably be immodest to use the word "theory") as to how corporate social responsibility can improve financial performance.
1. CSR can help companies "negatively" by enabling them to avoid costly mistakes: for example, actions that alienate important stakeholder constituencies, provoke lawsuits or government interventions, or create bad publicity that hurts sales or discourages valuable collaborations with other companies and other organizations. Polluting the environment, exploiting workers, and producing dangerous or shoddy products can be profitable in the short run; in the long run, I would contend, it is likely to be expensive and counter-productive.
2. CSR can also help companies "positively" by laying a foundation for innovative, profitable collaborations with stakeholder groups, as well as facilitating more proactive responses to emerging trends. Take the issue of global warming, for example. I would contend that companies that are facing this issue today (rather than fighting rearguard actions to resist recognizing it) are in a better position to be early developers of higher-efficiency energy technologies and to work cooperatively with environmental groups on new business models that address the climate change problem. Thus, they are better prepared than other companies to survive and thrive if and when massive dislocations hit industries due to global warming and the possible forced abandonment of fossil fuels. One could posit similar benefits from a proactive response to other kinds of CSR challenges.
I can't "prove" that this analysis is correct; as with most ideas from the world of business and management, it proposes causal links that are quite complex and subject to many, many complicating factors. Furthermore, it will take years or decades for these connections to play out and to show, in the long run, which companies will be winners and loser, and why. But my picture of how CSR relates to profitability seems inherently plausible to me and consonant with my subjective sense as to how the world works. And I think it is supported by business history, in which, over the long run, companies that are more socially responsible tend to enjoy greater and most lasting success than those that are less responsible--though of course this is a tendency, not an iron law.
Hope this is at least a useful first pass at an answer to your question. Thanks again for posing it.
By 
KW, on
December 26, 2007 7:07 AM
Hi Karl:
What you say makes sense to me. I think there is more to the story, though, which I agree will take time to flesh out. One other very powerful effect of investments in CSR, for example, is the impact it can have on shareholder value in companies that are publicly traded. Even a small positive change in market cap resulting from enhanced reputations can add up to huge amounts. This causal theory is especially applicable in cases where large institutional investors, such as pension funds, are explicitly looking for responsible companies to invest in as a matter of policy.
Regards,
Mark
By Mark W. McElroy, on
December 26, 2007 1:11 PM
Hi
Karl
I would really apprecaite being directed to commentary on CSR that provides a fully rationalised explantion for the logic that under pins CSR.
The story you report makes sense to me - there is not a strong linkage between CSR performance and financial performance, I think because:
Financial performance is not driven by good deeds - it is driven by commercial efficiency and marketing effectiveness. Neither is directly well related to CSR.
I do not understand the fundamental value of CSR in these regards excepting in the sense of avoiding being tagged as corrupt or malevolent.
More to the point I do not understand the value of CSR because the concept does not, to my way of thinking have fundemental value. Here is why.
In most western democracies we have legislative and economic systems that cause the values of our society to be internalised by the firm. Where the behavior of a firm is not captured by these legal and economic requirements and where the behavior might be seen as "good deeds" this might contribute to the firm having a high CSR rating. However such "good deeds" are not likely to contribute to efficiency and they are not likely to offer a great deal of marketing value.
So why would we expect them to offer high financial performance.
Whilst I support the intent of CSR in so far as I am an enthusiatic supporter of ethical and environmentally responsible behavior, I can not see how CSR makes much of a contribution. If we want good behaviour from firms we enact laws that require same and we adjust the commercial incentives to support such.
Behaviors that occur outside of this context are likely to be relatively unimportant and in any case they are not likely to be part of the firms competitive context. So where is the connection to financial performance.
Please help me understand. To my way of thinking there is only one bottom line - that delivered by the firm given the laws the firm is required to adhere to.
By , on
December 26, 2007 7:34 PM
Dear Anonymous:
For my part, if I may, all commerce proceeds from a value proposition of some kind. What CSR raises is the question of whether the prevailing one is the right one. In that regard, we have always had CSR. Evidently, you (Mr. or Ms. Anonymous) just happen to disagree with the new one being put forward. Or is it that you think financial performance in business must be driven by bad deeds, to use your language?
Let me put it this way. If a company is profitable, is that socially responsible? Irresponsible? Neutral? Is it OK for a company to make money for its owners? I think I hear you saying ‘Yes, of course it is.’ So it is not the being responsible part you disagree with, is it? Rather, it is the ‘what the company does’ that you contest. You want a company to be responsible, but only insofar as responsibility equates to maximizing profitability within the law, nothing more. You want responsibility to be consistent with your meaning of the term, not others’. If people are dying on the street outside the doors of your profitable company, and the law allows you to ignore them, you will ignore them. Right? ‘Yes,’ you say. Your theory of CSR says it’s OK to do so.
That said, let’s dispose of the CSR issue as if it’s debatable, shall we? We all have our CSR theories, even you. More to the point, you want corporate responsibility to be confined to profit-making and law-abiding. Companies -- or people who work for, or own, them -- who aspire to more than that are making illegitimate claims, in your view. Their acts are irresponsible because they go beyond the bounds of legally compliant profit-making. Is that correct?
What you are putting forward, my friend, is a moral theory, something like this: A company’s moral responsibility is to legally maximize its profits for its owners, no more, no less. It has no other moral obligations.
With respect, then, I suggest that before you demand explanations for contrary views as if the position you have taken is foundational, you, not us, should explain yourself. Why in the world should we accept your view of CSR instead of the one the rest of us increasingly propose? When did we all agree that monetary performance was the only metric for value, and how dare you make that assumption! Do you check in your moral responsibilities at the door each day on the way into work? And is that what you would have the rest of us do?
Regards,
(Not Anonymous) Mark
By Mark W. McElroy, on
December 26, 2007 11:56 PM
Hi Karl:
Thanks for bringing this article to our attention. What troubles me about your analysis, however, is the focus on correlations between CSR programs and financial performance. Why? Because strictly speaking, correlation tells us nothing about the possible causal connections between one factor and another. The question should be, do commitments to CSR cause improvments (or setbacks) in financial performance? Instead, you seem to be asking, can commitments to CSR be found in firms that are also doing well financially?
Thus, it is causation that we should be interested in, not correlation. Indeed, if all great presidents have green eyes, do green eyes cause greatness? I don't think so.
I'd be interested in hearing what you have to say about this. Especially if you have a pspecific causal theory about how commitments to CSR cause improvements in financial performance. If you do, what is the causal theory that accounts for it?
Regards,
Mark