Do companies with reputations for acting in socially responsible ways receive public goodwill when unpleasant news hits?
The question of how much (or even if) corporate social responsibility (CSR) policies benefit companies beyond the knowledge that they are good corporate citizens is much debated. There is next to no evidence that CSR positively adds to a company's bottom line, according to Felix Oberholzer-Gee, the Andreas Andresen Professor of Business Administration at Harvard Business School. "You cannot find a robust direct link between CSR and financial performance."
“You cannot find a robust direct link between CSR and financial performance”
It is true that in areas such as environmentally sustainable practices, customers have been willing to pay responsible producers a premium for products; take organic cotton, for example. For the most part, however, companies have had to content themselves with thinking that even if there isn't an immediate payoff for doing the right thing, then at least the goodwill they build up with the public will provide a buffer to offset negative publicity when something goes wrong.
The idea is that corporate social responsibility operates exactly like fire insurance. On any given day, you won't see any benefit. In fact, you could go years shelling out money for a service you aren't using. But on the day that, heaven forbid, your house does burn down, then you will definitely be glad you invested in insurance.
But does CSR "insurance" really pay off when companies need that goodwill from the public? In a recent working paper, No News Is Good News: CSR Strategy and Newspaper Coverage of Negative Firm Events, Oberholzer-Gee set out to test the insurance hypothesis using the real-world example of the 20 largest oil companies in the United States. Along with Jiao Luo and Stephan Meier, both of Columbia Business School, Oberholzer-Gee collected data on several thousand oil and chemical spills (most of them, thankfully, quite small) over a six-year period from 2001 to 2007. The researchers also collected newspaper reports over the same period to see how often companies received negative publicity for those spills, or whether, indeed, they earned brownie points for their superior environmental record when the inevitable accidents occurred.
To get a handle on where each company fell in its CSR initiatives, the researchers used stats from the corporate research firm KLD Research & Analytics, which ranked companies on "Environmental Strength," including positive measures such as pollution prevention programs, recycling, and energy efficiency; and "Environmental Concern," which includes negatives such as regulatory fines and emissions of toxic chemicals.
A Faulty Insurance Policy
The researchers hypothesized that those companies that had higher CSR ratings would be more likely to be reported in the media if a spill occurred. After all, it's not news when a company with a bad environmental record is reported to have been negligent; it's more notable when a good company screws up. But if the insurance argument held true, then greener companies should at least see more favorable coverage when spills occur, with the media being more likely to attribute them to chance or bad luck than negligence or malfeasance.
When the researchers ran the numbers, they found evidence to support the first part of their hypothesis: greener companies did receive more coverage for spills. A one-point increase in the Environmental Strength score resulted in a 25 to 35 percent greater chance that a spill would be covered. Surprisingly, however, they also found that companies with the lowest CSR scores were more likely to be reported in the press when they had a spill.
"Both the leaders and the laggards experience heightened media attention," says Oberholzer-Gee. "We didn't anticipate that."
To explain why companies with a poor CSR record make a convenient target for the media, the authors turned to sociological studies. These show that readers like unexpected news—explaining why accidents at the greenest companies were widely covered—but those same readers also find comfort in stories that conform to already-held beliefs. Therefore, readers might find interest in an oil spill by a company like BP, which for years portrayed itself as a leader in environmental concerns; but they might also find interest in an oil spill by ExxonMobil, demonized by some for its environmental lapses. The companies in the middle, meanwhile, received a pass since their neutral rankings don't fit into an easy narrative.
“A CSR positioning that says either you are already fantastic or you are trying to be fantastic is a risky position”
To test the second part of the insurance hypothesis—that companies with higher CSR scores garner more favorable coverage when spills were reported—the researchers performed a textual analysis of the newspaper stories, mining the text with software that ranks the tone of the words used in a given story. When they added up the scores, however, they found no difference in the tenor of the coverage for greener companies. Those companies with positive environmental records were criticized just as heavily as those with negative records.
"The idea that if you invested in CSR in the past, then people will think more highly of you in the case of an accident, this idea is not borne out in our data," concludes Oberholzer-Gee.
In other words, at least when it comes to oil spills, the goodwill "insurance policies" weren't worth the paper they were written on.
One lesson to take away from the findings is that managing media coverage and a company's reputation with regard to CSR programs is not trivial.
"A CSR positioning that says either you are already fantastic or you are trying to be fantastic is a risky position," says Oberholzer-Gee. Such claims raise the public's expectations and make the company a lightning rod for media coverage in the case of an accident or some other negative event. Meanwhile, he says, "those that make less extreme claims either are disregarded by the press or have a far less likelihood of seeing their failings exposed."
While that conclusion may seem cynical, Oberholzer-Gee does point out that there may be other perfectly legitimate reasons to engage in CSR—perhaps consumers will pay a premium for specific sustainably produced products; or perhaps having an environmentally responsible image will help in recruiting top talent.
"And of course," he emphasizes, "there is also the idea that companies should try and be good because they believe it's the right thing to do for the environment or their community."
In such cases, it's important to realize that there are consequences. "Sometimes in my interactions with executives, they say, 'We meant really well and we were socially minded, and now we don't see any return or gratitude,' " says Oberholzer-Gee. "It's important to have reasonable expectations about the consequences of that engagement, and hopefully that makes it more sustainable over time."
In other words, while doing good may be its own reward, sometimes it may be the only reward. It's up to each individual company to decide whether that is enough.