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Ideas for Leaders #666

CSR Benefits to Society from Private Companies Are Greater than from Public Companies

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Key Concept

Does Corporate Social Responsibility (CSR) benefit society? A new study based on exhaustive data reveals that while private company CSR commitments do benefit society, public company do not perform as well. 

Idea Summary

‘Greenwashing’ is a new term that describes the actions of companies whose corporate social responsibility (CSR) activities prove to be more window-dressing than action. Two Michigan Ross professors, Jun Li and Di (Andrew) Wu used a set of databases as proxies to answer a complex and important question: Does corporate social responsibility really benefit society?

The answer is not easy to uncover. Corporate social responsibility is a broad, multidimensional term that encompasses activities in environmental, society and governance (ESG) domains.

To develop a rigorous evidence-based answer, the researchers first identified companies that had signed on to the United Nations Global Compact, the world’s largest CSR initiative, with more than 20,000 worldwide participants, including nearly 6,500 companies. In addition to the breadth of participation, another advantage of using the UNGC as the indicator of social responsibility is that participating companies are monitored by the UNGC (as opposed to other initiatives in which the companies self-report their activities).

The next step was identifying each company’s impact on society — a mammoth job that would not be possible without the unique RepRisk database. Monitoring more than 80,000 media, regulatory and business documents in 15 languages, RepRisk, a sustainability consultancy, screens public and private companies on a daily basis for negative ESG incidents, which can range from environmental damage incidents to social issues, such as labour relations conflict, to governance issues, such as executive compensation.

To answer the question at the heart of the research — does CSR benefit society? — Li and Wu analysed the negative ESG incidents for companies before and after they joined the Global Compact.

The results were striking. For private companies, the rate of negative ESG incidents decreased an average of 6.3% after they signed on to the UNGC. For public companies, however, there was no significant decrease in negative ESG incidents, and in fact in some cases, the data showed an increase in such incidents after the company had committed itself to corporate social responsibility.

A closer look reveals the reason for the disparity between the public and private company results: conflicts of interest between shareholders and other stakeholders. The owners of a private company have some flexibility in terms of trade-offs between doing good and doing well. They may be willing launch an initiative that may not be good for the bottom line but is good for society.

In public companies, this flexibility all but disappears. In blunt terms, if a CSR initiative or program is great for society but not so great for the company’s shareholders, the needs of the shareholders are probably going to take priority.

On the other hand, if a CSR initiative is good for both stakeholders and shareholders, the initiative has a greater chance of being implemented. Thus, in areas of tax evasion, excessive CEO compensation or the wasting of resources, for example, the level of conflict (or conflict intensity) between the needs and desires of stakeholders and shareholder is low — i.e., everyone benefits if these problems are resolved. As a result, a commitment to the principles of the UNGC leads to decreases in incidents related to these areas.

In contrast, with issues related to collective bargaining situations, supply chains, or controversial products, for example, the conflict intensity is high— shareholders have different needs and wants than other stakeholders. As a result, even after public companies commit to CSR, there is no decrease in negative incidents related to these issues.

The research did reveal one interesting caveat to this general rule: public companies with consumer-facing products and services will follow up a commitment to CSR with a decrease in negative ESG incidents. The reason is clear: While B-to-B companies operate beyond the view (and interest) of the general public, consumers pay attention to the activities of companies such as retail chains or consumer product manufacturers. Just ask Nike. Thus, consumers will punish any egregious failure to follow through with a stated commitment to improving societal problems.

This consumer vigilance also explains why companies downstream in the supply chain — thus closer to the end consumer — are more likely to meet their CSR commitments than upstream companies.

Business Application

Does corporate social responsibility help society? This answer according to this research: depends on the ownership type. The researchers reveal not only the discrepancy between public and private companies in CSR but also the economic explanation for this discrepancy. Leaders of upstream or B-to-B companies who want to make a societal difference must be prepared to confront this economic pressure, or watch their companies fail to ‘walk the talk’ on CSR.

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Authors

Institutions

Source

Idea conceived

  • March 2017

Idea posted

  • August 2017

DOI number

10.13007/666

Subject

Real Time Analytics