If your firm is struggling to justify its sustainable activities, you'd better keep at least one aspect in good standing: your behaviour.
Corporate social responsibility (CSR) activities help firms meet their responsibilities to stakeholders, including employees, customers, and society. CSR can be broken down into two components: (a) product social performance and (b) environmental social performance. New research published in Strategic Management Journal suggests that product social performance has a greater effect on a firm’s finances than environmental social performance. This is especially true when firms misbehave.
Why Differentiate Between Product and Environmental Performance?
Product social performance refers to how well a firm’s product-related activities, such as marketing, development, and product characteristics, reflect its commitment to society. Environmental social performance refers to how well a company meets its environmental obligations to society, including reducing harmful emissions, recycling and regulatory conformance.
Past research has shown mixed results regarding the financial impact of CSR performance on a firm's bottom line. For this reason, researchers Satish Jayachandran and Kartik Kalaignanam from the University of South Carolina, and Meike Eilert from the University of Nebraska wanted to examine the individual impact of the two components of CSR, to determine the nature of each component's relationship with financial performance.
Researchers evaluated 518 companies (3701 firm-years) from S&P 500 and Domini 400 indexes according to KLD criteria. KLD criteria include indicators of strong and weak social performance in the product and environment categories. Performance in these areas was compared to a company’s Tobin Q value (a ratio of market value to book value) as a measure of financial success.
Two Very Important Findings
In improving financial performance, product social performance is more important than environmental social performance. What’s more, in both CSR streams, bad behaviour is punished more strongly than good behaviour is rewarded.
Good product performance pays, but good environmental performance doesn’t.
This likely happens because:
- Product performance more directly impacts stakeholders: A firm’s ability to create and sell products that meet consumer needs, while avoiding ethical issues, directly affects stakeholders and profits. While environmental performance may be of consumer interest, it does little to satisfy operational or transactional needs.
- Environmental performance is difficult to measure: It is much easier for stakeholders to evaluate a product than to determine the success of a firm’s environmental activities. Data reporting and collection on environmental impacts, such as ecological foot printing or carbon offsets, are not an exact science. Stakeholders may view such data as unreliable.
Stakeholders Punish All Bad Behaviour
When firms misbehave, it generates negative attention. As a result, stakeholders have been known to punish firms for bad behaviour more so than they reward for good behaviour. This is called “negativity bias” and it has also been seen in previous research (see Consumers Reward Companies for Ethical Production).
Results from this study suggest that poor behaviour in either CSR stream negatively affect financial performance. However, poor product performance was associated with greater financial loss than poor environmental performance.
Three Tips for Profiting from CSR Activities:
- Invest in socially responsible products. Managers should allocate resources toward innovation and product development in concert with more traditional CSR activities, like greening supply chains or donating to charity. Being known for a socially responsible product can lead to market leadership and a halo for your CSR more broadly. For example, Toyota markets socially responsible vehicles and is regularly rated as being environmentally responsible.
- Don’t ignore environmental performance. Although positive actions may not produce financial return, lapses in environmentally-focused CSR activities can prove costly.
- Tie environmental performance to other stakeholder interests. Be sure to communicate your environmental successes widely. In doing so, tie environmental activities to other outcomes valued by stakeholders. For example, link new supply chain efficiencies to competitive advantages or increased market access, in addition to the more abstract environmental outcomes.
Source: Jayachandran, S., Kalaignanam, K. & Eilert, M. (2013). Product and Environmental Social Performance: Varying Effect on Firm Performance. Strategic Management Journal, 34: 1255 – 1264.