The Measure of Responsibility

by John Peloza

Corporate social responsibility has become commonplace in business plans. Studies regularly report that consumers would switch to support a socially responsible business over one that is not responsible.
But what is CSR, and what does it mean to be socially responsible? Perhaps most important for managers, how can they develop a CSR plan that will resonate with consumers and other stakeholders so they will reward the firm?

The relationship between CSR and profitability has become one of the most studied relationships in management. Studies typically find a small but positive relationship between the two, suggesting that CSR can, in fact, be profitable.

But a closer examination of the relationship reveals it is much more nuanced, and requires far greater management skill than simply writing a cheque to a local charity.

The CSR initiatives of firms are constantly evaluated by a range of stakeholders such as customers, employees, regulators, shareholders and the media. Stakeholders can then reward firms they think are “doing good” and punish companies they feel are causing harm.

The problem is that social responsibility is in the eye of the beholder. Take, for example, the lessons learned by Nike in the 1990s: When Nike was confronted with concerns about sweatshop labour practices by its South Asian suppliers, the company cleaned up its act and is now often cited as a model example of how to integrate social responsibility into the supply chain.

Now consider the example of another athletic apparel maker, New Balance. A leaflet that came with a recent purchase from the company states the following: “While most of the footwear industry has moved its production overseas to take advantage of low labour costs … we continue to have many of our shoes made in the United States … New Balance remains committed to providing jobs for American workers.”

In considering these two examples, managers are faced with a dilemma: How can two companies pursuing directly opposing strategies in their supply chain both be socially responsible?

The answer, of course, is that it depends on who is evaluating the company. A consumer worried about human rights in developing countries may applaud Nike’s approach, but I doubt North American labour leaders and others worried about declining manufacturing jobs find it a compelling story.

So what’s the relationship to profitability? The answer lies in the ability of a given stakeholder (customer, employee, etc.) to either punish or reward company behaviour. Although a non-union employee in Southeast Asia has extremely limited capacity to reward Nike, the ability of such organizations as the NCAA — whose basketball players make a clear statement when they wear Nike shoes — to reward the company is massive.

Indeed, the NCAA left apparel contracts intact only after the company dealt with the allegations of rights abuses in its supply chain.

The challenge for New Balance is that the bad PR that can come from an unemployed U. S. worker is probably far less damaging than the bad PR that comes from exploited children. In other words, a powerful stakeholder views one — exploited foreign workers — as more important than the other –U. S. job losses.

To be fair, many of the initiatives set in place under the guise of CSR can, in fact, lead to financial benefits in and of themselves. Investing in energy efficiency, for example, can be justified on the basis of a cost/ benefit analysis and doesn’t require evaluation from anybody other than the finance department.

But the multitude of CSR reports found on company Web sites and money spent to promote “good deeds” by companies suggests much of the expected value comes in the form of reputation management.

This suggests that a marketing approach to CSR is the key to profitable CSR. If managers expect a financial return from CSR, they must segment their stakeholders, and tailor CSR activities to meet the needs of priority stakeholders, sometimes at the expense of others.

Using this approach, the firm can limit the negative impacts from stakeholders who view the CSR as negative. More important, it can enjoy rewards from stakeholders with the ability to reward the firm.

Prof. John Peloza is a professor at the Segal Graduate School of Business at Simon Fraser University in Vancouver. This article was published in the March 3, 2009 edition of the Financial Post. To read it online, visit http://www.nationalpost.com/todays-paper/story.html?id=1346373