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Small But Mighty Firms Make Proactive CSR Pay Off

Small businesses that proactively pursue CSR perform better than their penny-pinching peers.

Small businesses have unique strengths that enable them to pursue proactive corporate social responsibility (CSR). And those businesses that do proactively pursue CSR perform better than their penny-pinching peers – even in tough economic times.

The findings come from Nuttaneeya (Ann) Torugsa and Rob Hecker – both at the University of Tasmania – and Wayne O’Donohue from Griffith University. The researchers studied 171 small- and medium-sized enterprises (SMEs) in the machinery and equipment sector of Australia’s manufacturing industry.

Defining Proactive CSR

The authors define “proactive CSR” as CSR that “goes the extra mile.” It captures the environmental, social, and economic investments companies make beyond those required by law or regulation. By lowering costs, improving product differentiation and increasing energy efficiency, proactive CSR generates tangible financial payoffs for those companies. Compare this to “reactive CSR,” which involves expending the minimum resources necessary to comply with regulations and does not typically generate financial payoffs for companies.

Three Necessary Conditions for Proactive CSR

Previous research (most of it dedicated to large firms) reveals three capabilities predict a company’s ability to conduct proactive CSR:

  1. Shared Vision: Focusing everyone in the organization on a common sustainability goal aids organizational learning and encourages employee creativity. It helps generate the motivation and pressure that drive innovation and change.

  2. Stakeholder Management: Building collaborative relationships with suppliers, customers and investors helps eliminate any negative effects generated in the pursuit of competition, such as bad publicity.

  3. Strategic Proactivity: Careful scanning and analysis of external information equips you to anticipate and capitalize on emerging opportunities. For example, you may pay close attention to policy bills discussed by government leaders and foresee higher energy prices in the coming years. By investing now in new technologies that reduce your energy usage, you’ll save on costs and get ahead of your competitors.

Key Qualities of SMEs

According to survey responses, SMEs that conducted proactive CSR are more financially successful than SMEs that did not. Specifically, SMEs implementing proactive CSR reported possessing the three capabilities mentioned above and they reported being more financially successful.

The findings run counter to conventional wisdom, which assumes SMEs lack the expertise, spare capital and economies of scale necessary to invest in proactive CSR. But the findings do support the researcher’s theory that SMEs have unique characteristics that position them to pursue proactive CSR in other ways. These characteristics include:

  • Better entrepreneurial alertness

  • Simpler capital structures that improve efficiency and flexibility

  • A spirit of innovation that allows agile responses to competitors

The findings prove SMEs are effective at capitalizing on their unique characteristics to overcome their size limitations.

Methods and Future Research

The researchers developed their hypotheses using theories based on the “resource-based view” (RBV) of the firm. They collected their data using a questionnaire survey and analyzed the data using structural equation modelling. The survey relied on self-reporting, creating the possibility of bias. Future research in this area should examine how SMEs can develop the necessary capabilities for proactive CSR and whether the relationships and capabilities examined in this sector were applicable across other industries and markets.

Torugsa, N.A., O’Donohue, W., & Hecker, R. Forthcoming. Capabilities, Proactive CSR and Financial Performance in SMEs: Empirical Evidence from an Australian Manufacturing Industry Sector. Journal of Business Ethics.

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