To What Extent Is Corporate Social Responsibility (csr) Beneficial to a Company’s Performance?

To what extent is Corporate Social Responsibility (CSR) beneficial to a company’s performance?

With increasing public awareness and government endorsement on sustainable development, Corporate Social Responsibility (CSR) is not just a conception, but also a business reality. For instance, nearly 90% of the Fortune 500 corporations engage in CSR activities (Kotler and Lee, 2004). However, as Friedman (1970) argued, the widespread integration of CSR into business policies deviates from the ultimate organizational goal of maximizing stockholders’ return. This inspires a heated debate and vast investigation on the correlation between CSR and company’s performance. According to European Commission (2001), CSR was defined as how corporations voluntarily “integrate social and environmental concerns into their business operations and in their interactions with stakeholders”. Despite the inconclusive results in both theoretical and empirical research, which could be attributed to the complexity in identifying controlled variables and measuring the net impact on company performance accurately, the findings were generally neutral or positive (McWilliams and Siegel, 2000). This essay first suggests that CSR contributes to three dimensions of corporate performance, namely productivity, sales revenue, and financial performance. I will thereafter evaluate the preconditions for such positive correlation to be realized.

From the human resources perspective, CSR is largely instrumental in firms’ productivity through talent attraction. To illustrate, CEOs of some reputable corporations such as IBM and Home Depot initiated various employee-volunteer programs that deployed workers in community projects as a means to attract the young Generation Y workers (Grow, Hamm and Lee, 2005). Backhaus et al. (2002) further explained such phenomenon with the tendency of job seekers to perceive firms with higher scores on Corporate Social Performance (CSP) as more appealing and prioritized choices in their career selection. It is important for firms to hire high-caliber candidates to mitigate the skill shortage problem, particularly in this knowledge-based economy with tight labour market (Greening and Turban, 2000). Consequently, being able to attract a larger pool of job applicants can potentially form a sustained competitive edge and the prerequisite for business success. Apart from external recruitment, CSR also contributes to internal employee motivation and retention. A research conducted by Ali et al. (2010) presented a positive correlation between CSR, employee commitment and organizational performance, as measured by the market share, industrial competitiveness and financial gains. Kim et al. (2010) further demonstrated that CSR initiatives ranging from employee welfare to community involvement could fulfill the higher-order needs of the workers, as well as strengthen their self-identity through building positive corporate images. For instance, internal CSR initiatives such as reasonable salary, healthy work-life balance and community participation might satisfy employees’ needs and boost employee commitment (Bhattacharya, Sen and Korschun, 2008). As productivity is measured by output per worker, the combined effect of higher employee morale, improved recruitment attractiveness and lower turnover rate indicates that higher quality products or services can be produced while valuable human capital can be retained. Hence, the combined effect suggests that CSR may positively influence firm productivity and company performance.

Apart from the internal CSR contributions to company productivity, CSR is also a key determinant of external sales revenue, particularly due to the increasingly competitive marketplace and intensifying customer concern to CSR initiatives. A study conducted by Walker Research (1994) reported that 88% of the respondents are more likely to patronize a socially responsible corporation, given competitive price ranges and quality. Recent studies also asserted that CSR initiatives improve corporate goodwill and customer satisfaction, hence partially contributing to the firm’s stock return (Luo and Bhattacharya, 2006; Pivato, Misani and Tencati, 2008). Such correlation can be justified by the higher consumers’ perceived value and willingness to pay, followed by positive word-of-mouth on the firm’s products (Homburg, Koschate and Hoyer, 2005). Apart from being a potential driver to company profitability, CSR also serves as a risk mitigation strategy against public relations crises. Inadequate or ill-timed CSR initiatives can cause discrepancies between public expectation on CSR and corporate actions, thus dwindling public trust (Murray and Vogel, 1997). For instance, in the 1990s, Nike confronted a huge sales loss after a large-scale consumer boycott accusing its abusive labour practices, compelling Nike to pledge for sustainability (Porter and Kramer, 2009; Watson, 2015). Thus, it is concluded that negative CSR association to a firm can be detrimental to overall product evaluation and conceivably sales volume may shrink (Brown and Dacin, 1997). From a cost-benefit perspective, the long-term cost of evading social responsibility may exceed the immediate cost savings. The dual influence of CSR initiatives directly improves consumers’ perception, and indirectly insures the risk of image scandals, eventually boosting company performance.

CSR can influence corporate financial performance both positively and negatively. On one hand, some scholars predicated that CSR philanthropy dilutes the organization’s primary objectives and emphases on core business areas (Hayek, 1969). Coupled with the conventional debate that CSR incurs extra cost and manpower that could have otherwise been used to exploit other valuable opportunities, it is deduced that the company’s profit-making ability and financial performance might be negatively affected (Aupperle, Carroll and Hatfield, 1985). On the other hand, however, it is argued that the CSR expenditure incurred could be counterbalanced by other CSR cost benefits. To commence with, eco-friendly measures such as low-carbon production or waste recycling may enhance operational efficiency and reduce production cost. With increased eco-efficiency, for example, IBM achieved cost savings of $791m from 1990 to 2002 (Harvey, 2004). It is also discovered that socio-environmentally responsible companies are entitled to lower cost of equity capital because community-conscious investors perceive ethical stocks as less risky and of higher growth prospect (Sharfman and Fernando, 2007). Therefore, notwithstanding the implementation costs of CSR, socially responsible companies may reduce their overall operating or financing costs, raising their long-term financial standing and market value.