Not long ago, corporate social responsibility (CSR) was largely the province of a select few companies whose leaders had a particular flair for activism or whose products appealed to socially conscious consumers. But after a wave of corporate ethics scandals, a nationwide elevation in environmental awareness and a political push for stricter corporate governance, businesses are paying a lot more attention to how they operate.
Today, we expect companies to have a heart as well as a formula for maximizing profits — and many have taken note, embracing CS R activities aimed at making their businesses “green,” improving the communities where they are based and increasing workplace satisfaction.
CSR has become a hot topic, and many businesses have committed to making it part of their identities. What’s less clear is whether this touchy-feely approach touches the bottom line.
Binghamton University marketing professor Manoj Agarwal, whose award-winning work has examined branding’s impact on financial performance, is seeking to answer this question through important new research.
The very nature of CSR activity, Agarwal says, flies in the face of conventional economic wisdom, which denotes that companies are in business purely to make money. Because expenditures set aside for CSR activities naturally take dollars away from a different area, many economists view CSR programs as a waste of shareholder money. A newer, opposing perspective is that companies are corporate citizens, so shareholders are not necessarily the only stakeholders involved.
“Corporations are becoming a major part of most economies in the world, and their actions affect millions of people, based on what kind of products they sell, where they buy from and what practices they use toward employees,” Agarwal says. “It is very limiting to say a firm is only responsible to shareholders because they are the ones who are financially invested.”
Agarwal’s current research should shed some much-needed light on the question of whether embracing this stakeholder theory — and advertising it — is a smart financial move. Along with Guido Berens of Erasmus University in Rotterdam, he is investigating how a company’s branding strategy affects the link between CSR activity and financial performance. The research is funded by the Marketing Science Institute.
It is not hard to see why branding makes good fodder for studying CSR’s impact. A recent issue of Business Week provides a perfect example of the depth and breadth of companies embracing socially conscious advertising. On the magazine’s pages, readers find ads from Siemens, AT &T, Hewlett-Packard and Exxon Mobil promoting CSR activities ranging from the use of recycled materials in manufacturing to improving corporate diversity and helping to cure malaria in Africa. Obviously, companies want people to know about these activities.
“This kind of advertising is very topical right now,” Agarwal says. “Companies may be thinking, ‘Everyone is doing it so we should, too.’ But I am not sure how much these firms have analyzed their ads’ effectiveness.”
In the academic arena, research has only recently begun to look at the correlation between marketing and the bottom line. To date, analysis on the topic has yielded mixed results. “Some studies — maybe 60 percent — show a positive link between CSR activity and shareholder performance; about 10 to 15 percent show no link, about 10 to 15 percent show mixed links and the rest show a negative link,” Agarwal says.
Agarwal’s previous research has shown that, overall, companies following a “corporate brand” strategy tend to have better shareholder value in the marketplace than firms using a “house of brands” strategy. Corporate brands are those, like Kraft Foods, whose brand name appears on all its products, while “house of brands” companies — such as Yum! Brands Inc., which owns KFC, Taco Bell and Pizza Hut — do not use the firm name in advertising or packaging.
That corporate brands fare better financially is fairly intuitive. “Economic theory suggests if more people know about the firm, more people are going to buy the stock. That creates more liquidity for the company, reduces cost of capital and brings better returns,” Agarwal explains.
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