While, some years ago, the “social” and the “corporate” appeared to be unrelated concepts, today, it is difficult to perceive the two as separate domains. Addressing today’s significant challenges—such as population aging, youth unemployment, climate change, or the current pandemic—requires the active collaboration of all sectors of society. Accordingly, companies are increasingly called upon to intervene and assume an active role in finding solutions to these problems.
However, although business involvement appears to be beneficial to finding solutions to present-day challenges, the actual impact of such involvement on companies themselves remains unclear. Put simply, is it good for companies to do good? And does it make sense to be responsible?
Corporate Social Responsibility (CSR) is an inherently multi-dimensional concept. Along with its simplified definition as the voluntary integration of social and environmental concerns by companies in their activities, CSR can be understood in at least 37 different ways. In practice, CSR encompasses a diverse set of practices, including, but not limited to, financial contributions to local associations, promotion of a decent work environment free from discrimination, or reduction of pollution or waste in production processes.
In addition, CSR also covers relatively novel practices or concepts more integrated into companies’ strategies, such as, for instance, shared value creation, B corporations, or corporate social innovation.
In Portugal, CSR is an integral part of large companies’ activities. According to a recent KPMG report, over the last several years, more than 70 of the 100 largest Portuguese companies have consistently participated in CSR initiatives. Furthermore, according to a recent study by The Economist, Portugal is a worldwide success story in terms of social innovation, as it is one of the seven countries that have achieved top marks in national policy to stimulate social innovation.
Recent advances in CSR practices have sparked much interest in the scientific community. In this article, I will briefly review some of the key findings in recent research on CSR.
Is it really good for companies to be responsible?
Empirical evidence on this issue is rather controversial. On the one hand, a recent analysis of over 27,000 firm‐year observations over a period of more than 20 years found that companies’ active participation in CSR activities does not positively impact those companies’ financial performance. Rather, the causal relationship was found to be reversed: financially successful companies in a given year tend to invest more in CSR in subsequent years. Similarly, another study concluded that the relationship between CSR and companies’ financial performance is, on average, negative. The same result was replicated in the analysis of top-performing companies in Ghana. In these and other studies, higher levels of CSR expenditure were found to be systematically associated with less financial success.
On the other hand, there appears to be a relatively broad consensus that social responsibility is good for companies. In support of this view, a meta-analysis of 251 studies on the link between CSR and companies’ financial performance found that the effect is, on average, positive—but small.
Part of the reason why many previous studies found negative—or positive but small—effect of CSR on companies’ financial performance may be related to the fact that it takes some time for the effects of CSR to become perceptible. For instance, failing to observe an immediate effect of CSR on companies’ profits, this paper concluded that the most responsible companies have better financial results and greater chances of survival in the long term as compared to a similar group of less responsible companies.
So, what happens when companies become more responsible?
There has been extensive management research on the different ways in which CSR can improve companies’ future financial performance. In essence, this strand of research focuses on the effects of CSR on the relationships that are critical for a company’s good functioning—namely, those with employees, customers, and investors.
First, CSR enables creating strong connections between the company and employees. There is evidence showing that CSR positively affects workers’ identification with the organization, which, in turn, increases employees’ commitment and motivation. Interestingly, a recent study found that workers’ weak involvement and adverse behaviors (such as absenteeism) are frequent reasons why companies launch CSR actions. Similarly, another study that analyzed individual data of over 10,000 employees found that employees’ participation in a corporate initiative of a social nature significantly increases employees’ retention. Finally, there is evidence that social responsibility increases companies’ innovation by encouraging more experimentation and boosting employees’ innovative capacities.
Second, CSR also appears to improve companies’ relationships with customers. According to the results of a study that analyzed a group of companies over ten years, a company’s increase of donations to social causes results in the growth of its revenues in subsequent periods. This effect, which can be attributed to customer satisfaction, gets particularly pronounced in companies that produce goods or services directly for consumers (for example, clothing or food). Similarly, as reported in another recent article, the products introduced in the month when a company supported a charity event had a stronger commercial success than those introduced in other months.
Thirdly and finally, CSR appears to help investors to relate to the company. A company’s CSR involvement is a strong signal of its commitment to creating long-term value. Therefore, when companies announce a new CSR action initiative, investors tend to respond positively. In addition, CSR seems to function as a parachute that protects companies against adversities. For instance, when things are not going well—as in the case when a company faces a legal sanction—CSR helps alleviate investors’ negative reactions. Of note, however, this “parachute effect” is rather short-lived and requires continuous CSR investment.
The reviewed positive effects of CSR on strengthening companies’ relationships with their employees, customers, and investors highlight the need for companies to continuously invest in and promote the development of less tangible aspects of their business. The companies’ ability to differentiate and innovate, as well as their reputation and organizational culture, will enable them to have better financial results.
While today’s challenges are enormous, I am convinced that we must ensure that our companies remain increasingly committed to CSR activities and initiatives. Being better informed on this issue, we can more effectively use our interactions with companies to convince them of the good of doing good.
Have a great and impactful week!
João Cotter Salvado
Assistant Professor of Strategy and Entrepreneurship
Católica Lisbon School of Business & Economics
This article refers to edition #78 of the "Have a Great and Impactful Week" Newsletter.
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