How Corporate Social Responsibility Pays Off

L e e B u r k e a n d J e a n n e M. L o g s d o n

COMPETITIVE CONDITIONS in recent years have put pressure on firms to examine their philanthropy and other social responsibility activities. Cutbacks have occurred in many organizations because the rationales for continuing or upgrading these programmes have not been clearly articulated. However, a fundamental belief among its business supporters and business-and-society scholars is that corporate social responsibility 'pays off' for the firm as well as for the firm's stakeholders and society in general. But the failure to find strong empirical support for the relationship between socially responsible behaviour and financial performance 1'2 has been troubling. Rightly or wrongly, this lack of a clearcut empirical relationship between social responsibility and the bottom line is perceived by some executives and students as evidence that it is irrelevant for successful corporate performance, perhaps even antithetical to it. This article approaches the issue of linking corporate social responsibility (CSR) to the economic interests of the firm from a different perspective. Rather than focusing only on direct correlations between CSR programmes and short-term profits, the thrust of our approach is to examine the ways in which CSR programmes can create strategic benefits for the organization even when they are not readily measurable as separable contributions to the bottom line. The question that is addressed here is: under what conditions does a firm jointly serve its own strategic business interests and the societal interests of its stakeholders? This is an important question for managers and for stakeholders because without a clearcut understanding of strategic benefits that may accrue to the organization, it is more likely that top management will not invest in CSR practices which contribute to the long-term success of the firm. While a few organTOUGHER Pergamon
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izations with good reputations for CSR have encountered financial difficulties, we believe that the explanation for this decline lies not in their CSR activities but rather in their competitive environments and business decisions. A strategic reorientation of the firm's CSR philosophy can support its financial interests as well as other stakeholders' interests in the firm. How to reorient CSR toward a more strategic perspective is the key to inspiring more CSR activities, thus serving stakeholder and societal interests more fully.

A Tradeoff Between CSR and Profit? Historical Perspectives

The perception that CSR entails a zero-sum tradeoff with corporate economic interests is strongly identified with neo-classical economics. Even many defenders of CSR accept the zero-sum formulation,
Long Range Planning, Vol. 29, No. 4, pp. 495 to 502, 1996 Copyright 1996 Elsevier Science Ltd Printed in Great Britain. All rights reserved 0024-6301/96 $15.00+0.00

while at the same time embracing the social obligations of business. The classic literature in business and society asserted that while CSR might entail short-term costs, it paid off for the firm in the long run. 3'4 These scholars argued that firms would benefit from greater social legitimacy with less government regulation, and that a better society was simply good for long-term profitability. A complementary, though slightly different view held that CSR was appropriate for underwriting public goods which no single firm had a market incentive to provide. 5 The next stage in the academic debate over social responsibility focused on clarifying and quantifying the benefits from CSR. Empirical analyses of the relationship between CSR and profitability began to appear in the mid-1970s, but did not result in consensus. 1'2 These studies have generally used a single measure of social performance (such as an external reputational index, content analysis of corporate annual reports or peer ratings) which was correlated with various measures of company economic performance. Researchers have usually acknowledged the weaknesses of these single CSR measures, but point out the extraordinary difficulty of gathering data about the wide range of CSR behaviours for a sufficient number of firms to perform statistical analyses. More recently, some have argued that fundamental definitional problems with the CSR construct itself, in addition to measurement problems, make the efforts to find statistical associations between CSR and profits highly problematic. 6 While CSR researchers struggled with these issues, the field of strategic management was grappling with its own definitional problems. Just what exactly was business strategy? Some theorists defined strategy as the goals, mission, and objectives of the firm. 7'8 Others focused on strategy as plan, 9 pattern, 1'1~p r o c e s s 12 and positioning for competitive advantage. ~3'~4Within the classic strategy literature, discussions of the firm's external environment expanded beyond the traditional economic or market context. Strategy theorists such as Andrews 1 identified the relationship between corporate strategy and "the economic and noneconomic contribution [the firm] intends to make to its shareholders, employees, customers, and communities" (p. 13, emphasis added). Ansoff ~5 articulated the need for firms to develop societal strategies. As a result, environmental scanning and monitoring systems gained importance as elements of an effective information gathering system for strategy formulation. ~8'17Attempts to integrate the concepts of CSR and corporate strategy have included the stakeholder model of strategic management and the inclusion of social demands as strategic i s s u e s . 18'19 The integration of corporate social policy within the traditional strategy model was also furthered by the recognition that social response policies should be "strategically related to the economic interests of the How Corporate Social Responsibility Pays Off

firm" (Carroll and Hoy, p. 55). 2o The concept of strategic CSR builds on these efforts by demonstrating several fundamental ways in which CSR activities can be tightly linked to the strategy of the firm.

Strategic Corporate Social Responsibility

Corporate social responsibility (policy, programme or process) is strategic when it yields substantial business-related benefits to the firm, in particular by supporting core business activities and thus contributing to the firm's effectiveness in accomplishing its mission. While empirical studies to date have focused primarily on the link between CSR and financial performance (especially, short-term profits), we propose a more comprehensive basis for identifying the relationships between CSR and the firm's strategic interests. This broader set of criteria or dimensions attempts to capture the full range of strategic behaviour and opportunities for business to benefit from CSR. These dimensions are not intended to encompass all CSR activity. Much observed CSR behaviour remains nonstrategic, however valuable it is for stakeholders and society. Our attempt here is to develop better measures for assessing when and in what ways CSR activities jointly serve economic and societal interests. We have identified five dimensions of corporate strategy which are both critical to the success of the firm and useful in relating CSR policies, programmes and processes to value creation by the firm. Value creation is commonly viewed as the most critical objective for the firm and its strategic decisionmaking process. In assessing the probable contributions of CSR activities to value creation, the five dimensions of strategic CSR are: centrality, specificity, proactivity, voluntarism and visibility. Figure 1 shows the development of these dimensions of value creation and their linkages to definitions of strategy found in the academic literature.

Cen trality Centrality is a measure of the closeness of fit between a CSR policy or programme and the firm's mission and objectives. 21 Centrality is a critical issue in most definitions of strategy as goals or objectives. It provides direction and feedback for the organization by revealing whether given actions or decisions are consistent with the mission, goals and objectives of the firm. Actions or programmes having high centrality are expected to receive priority within the organization and to yield future benefits, ultimately translated into profits for the organization. For example, in the product development area, funds spent by a pharmaceutical firm on new drug research and testing have very high centrality. By contrast, the internal

Goals, mission, objectives (Ansoff, Andrews, Thorelli)

Centrality Closeness of fit to the firm's mission and objectives

Competitive advantage (Rumelt, Porter)

Specificity Ability to capture private benefits by the firm

Plan (Quinn)

Proactivity Degree to which the program is planned in anticipation of emerging social trends and in the absence of crisis

Value creation Identifiable, measurable economic benefits that the firm expects to receive

Process (Lyles)

Voluntarism The scope for discretionary decision-making and the lack of externally imposed compliance requirements Visibility Observable, recognizable credit by internal and/or external stakeholders for the firm

Pattern (Mintzberg)

auditing function, while important for the ultimate health and security of firms, generally has low centrality. With respect to strategic CSR, programmes or policies which are related closely to the organization's mission or tightly linked to its accomplishment have much higher centrality than traditional broad-based corporate philanthropy programmes. For example, the design, testing and manufacture of air bags for automobiles--a socially responsible product--was highly central to TRW, as was the correction of safety problems with this product. Similarly, political activities in support of mandatory automobile safety equipment have high centrality for a manufacturer of such equipment. But even philanthropy decisions can have a high degree of centrality. Merck's investment in developing and distributing the river blindness drug, Mectizan, is widely regarded as strategically

astute as well as humanitarian. The 18 million Third World victims of this disease have clearly benefited from Merck's contribution, and Merck itself benefits because of its enhanced reputation in the industrialized world, including increased reputational leverage with medical professionals and government regulators. The company also benefits in terms of employee morale, productivity and retention by supporting the ethical motivations of the research staff.

Specificity
Specificity refers to the firm's ability to capture or internalize the benefits of a CSR programme, rather than simply creating collective goods which can be shared by others in the industry, community or society at large. 13'14Externalities (whether positive or negative) and public goods are by definition nonspecific. By contrast, investments in research and Long Range Planning Vol. 29 August 1996

development leading to patentable products are highly specific. Many CSR behaviours, including many philanthropic contributions, create nonspecific public goods that are broadly available to a local or national community. For example, corporate donations to the San Francisco Symphony benefit Bay Area symphony-goers and others in the community who feel pride in or value the excellence of the local classical music scene. Neither of these benefits is specific to the donating firm since there is no exclusive enjoyment granted to the firm (although some of the firm's employees may hold symphony tickets). Similarly, smokestack scrubbers or waste water treatment facilities create public benefits (or avoid the creation of negative pollution externalities) which are available to the entire community. The firm discharging 'clean' smoke or 'pure' water benefits only to the extent that it shares in the enjoyment of a healthier environment and avoids censure or fines associated with failure to meet federal pollution enforcement standards. For a firm that exceeds existing standards for waste treatment, the benefit stream produced by pollution reductions beyond minimal compliance levels is public, i.e. nonspecific to the firm. One might argue that the firm may be motivated by the desire to save on future compliance costs. If so, the CSR behaviour may be strategic in terms of proactivity, another of the dimensions of strategic CSR. Contrast this with the case of a firm investing in cogeneration technology which recaptures heat discharged through smokestacks and converts it to energy which substitutes electrical power purchased from the local utility. In this case, the benefits of cogeneration are highly specific to the firm in the form of energy costs saved. The benefit spillover to the public is the firm's contribution to aggregate energy conservation. Cause-related marketing programmes offer similar specific benefits to the sponsoring firm as well as to recipient nonprofit organizations.

changes requiring more skilled or differently skilled labour will be better prepared to shift to new technologies and will encounter less resistance in doing so. Motorola has excelled in providing remedial education and specialized training for employees so that Total Quality Management and other improvement programmes could be implemented more effectively by a more qualified workforce. An example of proactivity in the CSR context is a manufacturer monitoring emerging social trends and regulatory initiatives regarding pollution control. A company whose active investigation identifies new smokestack technologies to meet forthcoming or prospective regulations at a low cost would clearly gain a long-term competitive advantage over its competitors. But even more proactive is the firm which fosters pollution reduction throughout the organization because it has anticipated that pollution-related costs will increase over the long term. For example, 3M Company developed the Pollution Prevention Pays (3P) programme in 1975 and had reduced pollutants by over 575,000tons by the early 1990s. The 3P Plus programmme was recently introduced to provide an even more holistic approach to pollution prevention. 23 Similarly, a consumer products firm pursuing an environmental marketing strategy would be better positioned to roll out environmentally friendly packaging in a timely fashion for the 'green' decade of the 1990s, as Procter & Gamble has done. By contrast, cutting back on R&D aimed at finding substitutes for CFCs in the early 1980s may have hurt DuPont's dominance of that market niche more than the cutbacks helped the immediate bottom line.

Voluntarism
Voluntarism indicates the scope of discretionary decision-making by the firm and the absence of externally imposed compliance requirements. Voluntarism is closely linked to proactivity, especially to the extent that it presumes the absence of regulatory or other mandates. In general, philanthropic contributions are assumed to be voluntary--although executives are often subject to social network pressure to contribute to favourite charities. 24 Firms regularly engage in voluntary behaviours in their core business functions, e.g. in decisions regarding product line and new product introductions. In general, normal business activities are considered voluntary in the sense that firms maintain high levels of control and discretion over day-to-day operations. In the CSR domain, the firm which exceeds minimum standards for quality or safety, such as an airline which exceeds FAA inspection and maintenance requirements, exhibits voluntarism. These activities offer both strategic and social responsibility payoffs. In many cases additional mandates come into play only when such voluntary behaviour ceases, often in the face of short-run financial pressures. For example,

Proactivity
Proactivity reflects the degree to which behaviour is planned in anticipation of emerging economic, technological, social or political trends and in the absence of crisis conditions. Proactivity has long been identified by business strategists as an important characteristic of planning and scanning systems. 9'1'22 In turbulent environments firms must constantly scan their environments to anticipate changes likely to affect the firm. Such changes can range from new market opportunities to emerging social issues or threats. The firm that recognizes critical changes early will be better positioned to take advantage of opportunities or to counter threats. For example, a firm which introduces an employee education and retraining programme in advance of coming technological How Corporate Social Responsibility Pays Off

the perceived decline in US airline performance in the late 1980s with respect to on-time arrivals and baggage handling led to new requirements for airlines to publicly report performance in these areas.

side world. They may also produce economic benefits for the firm by improving productivity, morale or loyalty, thus making it easier for the firm to attract and retain the best employees.

Visibility
Visibility denotes both the observability of a business activity and the firm's ability to gain recognition from internal and external stakeholders. Visibility can have both positive and negative consequences for firms. Positive forms of visibility involving normal business activities include favourable media mentions, strong earnings announcements, stock price run-ups (not associated with impending hostile takeovers) and successful new product launches. Instances of negative visibility include government investigations of contract fraud, the indictment or sentencing of company officials, the discovery of dangerous side effects from otherwise beneficent drugs, cases of poisoning and other forms of commercial terrorism, or the disclosure of toxic contamination in waste disposal sites. Visibility for CSR activities is less likely to be negative, although the CSR behaviour and resulting publicity may arise from initially negative events. For example, the discovery of toxic shock syndrome and its link to tampon use were certainly negative events. But Procter & Gamble's response, in the form of its recall of Rely tampons, generated significant positive visibility for the company and, by extension, enhanced the perceived reliability of its many other products. 25 Similarly, Johnson & Johnson's rapid and complete response to the Tylenol poisonings underscored the firm's concern for its customers and brought high visibility to its long-standing corporate code of conduct. An unanticipated consequence of the Tylenol episode is that Johnson & Johnson's code is now the most widely known corporate code among business students, often used in business-and-society courses as a model for all firms. Clearly these two well-known cases illustrate voluntary CSR responses which resulted in positive visibility in the wake of negative initial events. This contrasts with Exxon's experience with the Valdez oil spill. In that case, negative visibility resulting from the initial event increased w h e n the expected response capability failed to materialize. Exxon's treatment of, and information releases about, the extent and nature of the oil spill further reinforced the already negative publicity surrounding the initial event. Visibility, unlike most of the other dimensions, may be particularly relevant with respect to the firm's internal constituency--its employees. For example, creative and extensive employee benefit programmes, such as comprehensive health care, on-site day care and continuing educational benefits, are likely to be highly visible within the firm, even if not to the out-

Value Creation as Strategic Outcome

The ultimate measure of strategic benefits from CSR activities is the value they create for the firm. Value creation refers to the readily measurable stream of economic benefits that the firm expects to receive. This dimension also most closely approximates the attempts by earlier researchers to find relationships between social responsibility and economic performance. Firms create or attempt to create value in their ongoing business activities through investments in new technology, new products, brand awareness, production facilities, training and customer service. To the extent that some of these also constitute or are integrated with CSR objectives or goals, these CSR programmes are among the most likely to create demonstrable economic benefits to the firm. Figure 2 provides a number of examples of potentially strategic CSR activities and the benefits which they offer to firms. Once the concept of strategic CSR is accepted by executives as feasible, the next step is to develop methods of analysis and guidelines to capitalize on these opportunities.

Implications for Management Practice and Research

Increasing competitive pressures have caused executives to examine the nature and extent of their firms' CSR activities. At the same time, governmental capabilities for solving social problems have been called into question, and in many cases society is looking to the business sector for assistance in identifying and implementing remedies. Meanwhile, many of these social problems are becoming more acute. It is critical for executives to consider the consequences of these trends. They do not bode well for communities or for firms. One answer is strategic corporate social responsibility. By becoming more aware of the benefits to both the firm and its stakeholders, managers can make better decisions about CSR activities. For example, in a community suffering from a high drop-out rate in secondary schools, managers can design and implement many effective programmes for keeping at-risk teenagers in school. Many of these programmes are not very costly to firms, particularly w h e n they encourage employees to volunteer. In addition, there are often payoffs to firms which employ and sell products or services within these communities. If we recognize the long-term investment characteristics of CSR (as opposed to thinking of CSR merely Long Range Planning Vol. 29 August 1996

Centrality

Specificity

Proactivity

Voluntarism

Visibility

Value created
Customer loyalty Future purchasers

Philanthropic contributions ($, product, time)

Community support

.'omputer donations to Accustom new users schools by computer to firm's products vs mfrs. competitors' Engineering research fellowships Health/wellnness Day care Flex-time Higher employee loyalty Employee loyalty and morale New or uncommon benefits Internal: .=mployee loyalty and morale

Employee benefits (direct or indirect)

Productivity gains

New products e.g. 'green' Patent or innovation edge in product or process development Learning curve advantages Positive relations with regulators Public relations and/or marketing advantage New products or markets

Environment management (health, safety, pollution)

Process innovation esp. re pollution

Political activity (PAC, lobby or information, independent or industry)

New business opportunities if prepositioned to take advantage of new rules

Favourable change in economic or social regulations

Pre-positioning for changes in regulations

New product or geographic market opportunities

Product or service related characteristics, innovations or processes

Patent or innovation edge first-to-market brand loyalty

Product reformulations e.g. 'green' improved design, e.g. fuel efficiency new products, e.g. airbags

Environmental scanning to create edge in design or product ideas

Fi rst-to-m a r ket or leadership benefits

New product on new markets Edge in meeting emergency needs

as current period expenditures), then normal business decision rules would select CSR activities which 1. yield the highest total payoffs in terms of collective benefits to the firm and its stakeholders and 2. fall within the range indicated for strategic CSR. To identify such projects, the firm should incorporate CSR planning and investment within its corporate planning function. Specifically, the firm should carry out the following analysis: Q Identify the stakeholders which are critically important for achieving the firm's mission, goals or strategic objectives. Q Determine the socially valuable CSR policies, programmes and projects which address the needs and interests of these stakeholders. t3 Assess the opportunities offered by these CSR projects to enhance the firm's attainment of strategic objectives or to solve significant problems and threats facing the firm. (Centrality.) Ca Assess the degree to which these CSR projects offer benefits which can be captured and/or internalized by the firm as opposed to all firms in the industry or society at large. (Specificity.) ~1 Anticipate future changes in the firm's environment and changes in the needs of its key stakeholders which could be addressed through proactive CSR policies and activities. (Proactivity.) ~3 Determine the baseline of mandated requirements in order to identify the opportunities for voluntary activities. (Voluntarism.)

O Identify opportunities to create positive visibility with key internal or external stakeholders from CSR activities. (Visibility.) ~3 Measure and compare the value or potential value expected from various CSR projects. (Value creation.) To the academic community, the concept of strategic CSR provides an opportunity to measure the benefits of CSR in a broader context than simple correlations between philanthropic contributions and profits. Recent literature in the business-and-society field implicitly or explicitly takes a more strategic orientation to various components of C S R . 26'27 Greater precision in specifying the attributes of strategic CSR will help future researchers to identify the broad range of business activities which represent CSR behaviour. In this vein, work needs to be done on 1. creating sound measures of strategic CSR for empirical research; 2. exploring the linkage between CSR and the alliance behaviours of firms; 3. examining the role of industry leaders in establishing norms for CSR and in innovating strategic CSR. A comprehensive framework should help managers to identify opportunities for and justify greater attention to CSR behaviour which can be linked to the strategic interests of the firm. Several of these ideas appeared in a paper with Martha Reiner which was presented at the International Association for Business and Society 2nd annual conferencein Sundance, UT.

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How Corporate Social Responsibility Pays Off