Leveraging Corporate Responsibility: The Stakeholder Route to Maximizing Business and Social Value
340 pages, Cambridge University Press, 2011
The corporate social and environmental responsibility movement, known more generally as corporate responsibility (CR), shows little sign of waning. Almost all large corporations now run some form of corporate responsibility program. Due to widespread acceptance that doing good for social and environmental causes can be good business, most large companies have by now commissioned some form of volunteering or charitable giving initiatives, designed sophisticated environmental sustainability programs and purged a substantial amount of unethical practices from their supply chains. Despite this widespread belief that CR can simultaneously improve societal welfare and corporate performance, most companies are largely in the dark when it comes to understanding how their stakeholders think and feel about these programs. But if companies are to benefit from their corporate responsibility initiatives they must actively involve their stakeholders say CB Bhattacharya, Sankar Sen and Daniel Korschun.
The bad news for managers is that mere engagement in CR is no longer enough to differentiate a company from competitors in the eyes of customers, employees and other important corporate stakeholders. The challenge today is not only to make a business case for CR but rather to create, communicate and calibrate CR so that it conforms to the ever-increasing expectations of stakeholders. Thus, the trickier, and arguably more interesting, task is still ahead of us.
That task is to understand how stakeholders view, interpret and ultimately respond to CR programs. And this means we need to delve into the psychology that drives stakeholders’ relationships with companies.
In our book we have integrated over a decade of research that sheds light on how and when CR fosters relationships that create value for a company. We concentrate not on the direct route to value, whereby a company creates value by, for example, saving money through efficient processes but rather via something we call the indirect or stakeholder route, where a stakeholder learns about a social or environmental initiative and responds accordingly. Our approach differs from many contemporary treatments in that it is empirically based, combining insights gleaned from an array of lab experiments, field studies and analysis of secondary data.
The fundamental premise of our book is that CR provides opportunities to strengthen relationships between a company and many of its key stakeholders. Strong company-stakeholder relationships are built upon trust and a perception that the company shares a stakeholder’s values. Accordingly, we argue that for CR activity to generate value for a company it must not only reinforce the company’s core values, but also fulfill some of the most basic needs of its stakeholders.
Our research shows that stakeholders interpret CR based on three interdependent concepts that are in turn key leverage points for executives wishing to manage CR activities more effectively. The first is a stakeholder’s Understanding of CR itself. Here the stakeholder assesses whether CR programs are in fact improving societal welfare and tries to uncover what motivated the company to engage in CR in the first place. For example, in a study conducted for a Fortune 500 consumer goods company, we found that awareness of a CR program (in this case a gift to a child development center) yielded significantly greater intent to purchase its products when stakeholders attributed the gift to “genuine concern” for children on the part of the company.
The second aspect of stakeholder interpretation of CR is Usefulness, or the degree to which the activities provide some form of benefit to the stakeholder. CR may provide Usefulness in tangible ways such as energy savings from efficient appliances or in psychological ways, by enhancing self-esteem. In a qualitative study of employees at a multinational company, we found that some employees who live in countries where there is considerable ill will towards the company use CR as a way to shield their self-esteem from verbal attacks. These people told us that when they came across criticism from friends or family they could point to the company’s CR as evidence of the organization’s benevolence. Thus, managers should not ignore CR’s ability to fulfill basic stakeholder needs and stakeholders’ desire to benefit personally from CR. Understanding and Usefulness work in concert to forge a sense that there is Unity (the third concept) between the stakeholder and the company.
Unity – the overall sense that the company’s values match those of the stakeholder – is the “gateway” to the CR value that companies seek. Given a choice, stakeholders tend to deepen relationships with companies with which they sense Unity and withdraw from companies with which they have a mismatch in values. CR is a compelling signal of a company’s central and enduring values. In support of this notion, in a study of over 500 front-line employees from across American companies we found that Understanding and Usefulness are capable of leading to important outcomes such as reducing an employee’s intent to quit and becoming a loyal customer themselves, though only to the degree that they perceive a sense of Unity with their employer.
Importantly, we do not view CR as yet another cynical instrument of corporate profit. Instead, we argue that for firms to gain value from their CR efforts those efforts must improve the lives of their stakeholders in significant ways. In other words, creating social value is a prerequisite for creating business value. The first implication of our framework is that companies need to eschew the notion that CR must be enacted in a top-down way. In a recent survey, 71% of companies reported to the UN Global Compact that CR policies and practices are currently developed at the CEO level. Instead, our research shows that the best way to improve Understanding of CR activities, make activities maximally Useful to stakeholders and foster Unity is to involve stakeholders in CR activities whenever possible. Stakeholders want to be the enactors of CR, with the company serving mainly as an enabler and source of aggregation of corporate resources.
The second implication from our research is that communication needs to become more prominent in CR planning. We find that for many companies awareness of CR, even among employees, is often quite low. Even at some companies that give millions of dollars to charity and enact major sustainability programs, awareness is frequently in the low double digits.
Too many companies limit their CR communication to an annual report and a few electronic repositories (one employee we spoke to said that there was information “sitting on the hard drive” but that few people ever accessed it). CR management needs to include a communication plan that clearly articulates how effective programs are, how they fit into the company’s strategic plan and how CR can benefit stakeholders.
Finally, companies that want to maximize CR value are going to have to measure stakeholder responses with more discipline than they currently do. It is not uncommon for companies to spend millions measuring customer preferences of products and services or employee job satisfaction while few can use the same disciplined approach when assessing the value generated by CR activity.
Our framework provides three leverage points (Understanding, Usefulness, and Unity) that managers need to track when assessing CR activities among stakeholders (our book provides measures that we have used in our research). Tracking these levers against changes in the CR portfolio is critical so that managers can calibrate activities according to stakeholder reactions.
Many companies have begun to look more deeply at their CR activities, trying to assess which are providing value and which are simply not sustainable from a business perspective. Our research indicates that the key to this analysis is to delve into the mind of the stakeholder, understanding how he or she interprets CR and how learning about CR activities may improve or harm the relationship with the company.