Discover how investing in CSR insures your firm by protecting your reputation and reducing financial impact of negative press.
You company can improve its reputation and reduce the financial impact of negative publicity through strategic social investments.
While many studies have looked at CSR as a response to social pressures or simply as a cost of doing business, few have examined how it can be leveraged to provide benefits and mitigate harm. A study by John Peloza – Associate Professor at the University of Kentucky, and NBS Topic Editor for Valuing Sustainability – aims to address this gap by studying how CSR (in this case, support for charities and social causes) can act as insurance to protect company finances and reputation.
CSR Insures the Bottom Line
This paper uses studies, models, and case examples on the relationship between CSR and financial performance to outline how CSR can be used as “insurance” for companies.
The author identified three factors that allow CSR to be leveraged for insurance: high effort and commitment, modesty in promoting CSR, and support for causes relevant to a firm’s core business strategy. These strategies help managers build firm reputation, maintain sales, and gain customer goodwill and third party promotion.
Positive CSR acts as insurance by protecting reputation and reducing the financial impact of negative publicity.
Firms viewed as having weak CSR suffered stock declines twice the size of firms viewed as having strong CSR after riots surrounding 1999 WTO meetings in Seattle. Furthermore, consumers’ purchase intentions were twice as high for products of companies described as having a strong CSR reputation compared with those with a weak CSR reputation following a product recall. Lastly, it was found that if no negative publicity occurs, CSR still provides value to the firm through insurance. Even if the relationship between CSR and financial performance is neutral, the insurance value can still justify CSR investment.
Three Keys to Leveraging CSR
Managers can follow three points to successfully leverage the insuring benefits of CSR:
Develop long-term relationships with social causes. Use employee volunteer programs, product donations, advocacy support, and resource access e.g. legal support. This can show commitment, which helps build your company’s reputation.
Be modest in promoting CSR to gain customer goodwill and third party promotion. Leading brands such as Citibank, 3M and GE value “discrete” support for social causes. Tobacco giant Phillip Morris was criticized for spending more on promoting its charitable donations than it donates, and for insincerity in airing its own anti-smoking campaign.
Choose a few social initiatives based on fit with your business strategy. Stakeholders see actions as less self-serving when firms make contributions in areas of expertise rather than donating to generic causes. For example, Home Depot provides money, volunteers, and products to help the non-profit KABOOM! build playgrounds for inner city children.
Future research can uncover when CSR protects reputation and when it does not. This can include both variables affecting the type of reputation for positive CSR (e.g. commitment and effort) and variables related to the negative event such as stakeholder attributions of blame, the severity of the negative event, or perceived similarity between the negative event and the previous positive CSR initiatives.
Peloza, J. 2006. “Using Corporate Social Responsibility as Insurance for Financial Performance.” California Management Review. 48.2: 52-72.