Managers can increase revenues and reduce costs when they understand the role of Corporate Social Performance (CSP) in driving Corporate Financial Performance (CFP).
The previous 30 years of research on the relationship between CSP and CFP has produced some conflicting results, making the business case for CSR a very controversial area. However, little is understood about the specific processes by which CSR can impact in CFP.
What Elements Drive CSR?
Although previous academic research has focused on aggregate measures of CSP, treating it as an overall score, researchers Francesco Perrini, Angeloantonio Russo, Antonio Tencati, and Clodia Vurro from Bocconi University discuss the individual, underlying drivers of the performance associated with CSR and their ability to improve revenue and reduce costs.
The authors reviewed literature from the past 30 years that examined the link between CSP and CFP resulting in a multi-level framework that focuses on the underlying drivers of the relationship between CSP and CFP.
Six Drivers of CSR
The authors use existing literature on the CSP and CFP link in order to categorize six underlying drivers of CSR performance:
- Organizational drivers such as organizational values and engagement in ethics-oriented practices and programs.
- Customer drivers including the ability of CSR to signal quality to consumers that can lead to favourable views of the organization by consumers and enhance consumer loyalty.
- Society drivers such as the accumulation of social capital as a result of transparency, goodwill, and good citizenship.
- Natural environment drivers such as pollution prevention and environmental strategies that can lead to competitive advantage for firms.
- Innovation drivers including the potential positive impact of environmental goals that result in widespread changes in operations that foster innovation.
- Governance drivers including disclosure practices that lead to greater visibility with stakeholders and financial partners.
Six Take-aways for Managers
- CSR reporting practices strengthen your organization. The process of documenting and communicating CSR practices provides benefits to corporations, including the ability to formalize their position on CSR, identify organizational strengths and weaknesses, and manage stakeholder relationships and expectations.
- CSR enhances your human resource management. Firms with established reputations as positive places to work can attract talented employees. Employees at organizations with positive CSR practices and ethical values are more committed to the organization and have greater job satisfaction. Employee engagement can lead to both cost savings and growth opportunities.
- Customers care about your CSR practices. Consumers are more committed, more satisfied, and identify strongly with organizations that have visible and well-established CSR practices. This effect can lead to multiple revenue opportunities.
- Environmental performance influences your bottom-line measures. Improving environmental practices such as reducing pollution and improving waste management can lead to better financial performance through both increased revenues (e.g., enhanced brand equity) and lower costs (e.g., operational efficiencies).
- CSR practices make your business appear less risky. Organizations engaged in CSR signal to stakeholders that they are committed to meeting stakeholder demands. Such organizations appear to potential lenders and investors as encompassing less risk. This perception can lead to revenue opportunities (as a result of positive positioning) and cost savings (as a result of a lower cost of capital).
- CSR can drive innovation. Operational and cultural changes resulting from CSR can lead to growth opportunities through new product development, and to cost savings from production efficiencies.
Empirical research could be used to test the relationships between the underlying drivers of CSR-related performance as presented in the theoretical model. Future research could identify the individual drivers most strongly related to positive CSP and CFP. Additionally, future research could identify the contexts in which the revenue-generating and cost-reducing effects are present.
Perrini, F., Russo, A., Tencati, A., and Vurro, C. 2009. Going Beyond a Long-Lasting Debate: What is Behind the Relationship between Corporate Social and Financial Performance? Working paper, SDA Bocconi School of Management.