CSR Provides “Reputation Insurance” When Products Fail

Your company’s environmental track record will strongly influence whether or not people blame you when things go wrong.

If the tragic day comes when your company’s car accelerator pedals start sticking, your pain relief pills get poisoned, or your oil rig explodes, pouring millions of barrels of crude into the ocean, your company’s environmental track record will strongly influence whether or not people blame you for the product failure.

Researchers Jill Klein of INSEAD and Niraj Dawar of the Ivey Business School (Western University) discovered consumers are more likely to blame product failures on external factors when a company has a good CSR track record. In other words, strong environmental performance serves as “reputation insurance” in the wake of a product-harm crisis.

What is a “Product Harm Crisis”?

The Financial Times defines a product harm crisis as “a highly publicised event caused by a product being found to be defective, contaminated or even harmful to consumers.” Famous product harm crises:

• BP oil spill in the Gulf of Mexico – USA, 2010

• E coli outbreak in beef processing at XL Foods – Canada, 2012

• Red Cross tainted blood scandal – Canada, 1980’s

• Contaminated baby formula – China, 2008

• Lead paint in Mattel children’s toys – China, 2007

• Tylenol products laced with cyanide – USA, 1986

Prime people with CSR track records.

The authors hypothesized that companies with positive CSR track records would receive less ire from consumers during a product-harm crisis. They tested their hypothesis using two studies.

The researchers presented each study subject with background information about a fictitious oil company called “OilCo.” Some subjects heard OilCo was very environmentally responsible, ranking first among 14 oil companies for environmental performance many years in a row. Other subjects heard OilCo was consistently ranked 14th in its industry for environmental performance. A control group received no background information.

Study participants then learned an OilCo lubricant caused severe engine damage to several hundred vehicles. The damage, however, was partly the fault of retailers that sold the lubricant past its expiry date.

Consumers forgive green companies for faulty products.

Subjects who thought OilCo had a poor environmental track record were far more likely to blame the company for the product failure. The experiment subjects who believed OilCo had a strong environmental record, however, gave the company more favourable ratings in the questionnaire and were more likely to blame the lubricant damage on external factors.

CSR as subtle brand insurance.

“The most crucial finding of this research is that CSR has a very powerful effect on consumers’ brand perceptions during a product-failure crisis,” said Consumerism Editor Remi Trudel. “Implementing positive environmental practices and cultivating a good CSR image serves as a form of ‘insurance’ in a product failure situation.”

Business leaders in consumer-focused industries who still struggle to make the business case for sustainability should frame CSR investments to senior managers as risk management or reputation management activities that pay off when products fail.

Klein, J. & Dawar, N. 2004. Corporate social responsibility and consumers’ attributions and brand evaluations in a product-harm crisis. Working paper 203-217, International Journal of Research in Marketing.