Is Good Corporate Citizenship Also Good for the Bottom Line?

(Photo: Tom Raftery)

Our latest Freakonomics Radio on Marketplace podcast is called “Is Good Corporate Citizenship Also Good for the Bottom Line?” (You can download/subscribe at iTunes, get the RSS feed, listen via the media player above, or read the transcript here.)

The short answer: yes. That’s the finding of Robert G. Eccles, Ioannis Ioannou and George Serafeim from their recent paper “The Impact of a Corporate Culture of Sustainability on Corporate Behavior and Performance” :

“We show that there is significant variation in future accounting and stock market performance across the two groups of firms. We track corporate performance for 18 years and find that sustainable firms outperform traditional firms in terms of both stock market and accounting performance.”

You’ll hear Serafeim explain his findings and you’ll also hear from Georg Kell, executive director of the UN Global Compact. Its mission is to help companies around the world adopt the behaviors of Corporate Social Responsibility (CSR) — which include not only good environmental stewardship but also fighting corruption and the ethical treatment of employees and customers. All of this is, alas, easier said than done:

KELL: “Well, if you were to ask me for the Global 1,000 corporations, how many of them are sincere and serious about sustainability and long-term value creation?  Our own implementation survey and others done by other leading think tanks will probably suggest we are probably at 15 percent.”

You can search here for companies that participate in the Compact. And, perhaps more interestingly, you can look up which companies the Compact has expelled for non-compliance (and here’s an update of the expelled list).

One key component of a “high-sustainability” company is thoughtful long-term planning. One interesting example is Dow Chemical, an upstanding member of the UN Global Compact since 2007 and the focus of an HBS case study by Robert Eccles. Dow has gone through two cycles of 10-year goal-setting and is now debating whether to set goals for the next 100 years. Here’s what David Kepler, Dow’s chief sustainability officer, told us:

KEPLER: “What our first set of goals were that were 10-year goals started in 1996. Energy efficiency was a big part of that. In that period of time, we saved almost $5 billion around energy efficiencies. So there’s an economic story, but there’s also an environmental story in that.”

Unfortunately, we didn’t have space in our Marketplace piece for the Kepler conversation, nor for our conversation with Intel’s chief operating officer Brian Krzanich, (who may be the firm’s next CEO). Intel has been issuing corporate responsibility reports since 2001, and keeps a running CSR blog:

KRZANICH: “I think those things come hand in hand — they’re properties of what makes a company great.  It’s just being exemplified in a different arenas.  It takes good strategic thinking to think far enough out in advance and say, ‘I’m going to get a return on investing in the communities and the education systems so that my workers five, seven, eight, ten years out are going to be stronger and better and the kind of workers I want.’ That same kind of strategic thinking delivers better products and better product road maps.”


Matt Keen

In this day and age, undoubtedly. Bad practices and poor governance spread like wildfire around the net, while reducing your carbon footprint will inevitably result in costs savings through using less resources. Simple.

Chuck

I believe that this can add value (in both profits and stock price) to companies in the long run.

But I think an interesting question is: Does the stock market value react in the short run to new information indicating that a Company is being a "better" corporate citizen?

I believe that the stock market "punishes" companies in the short run for being "Good Corporate Citizens". (Source: http://digitalcommons.iwu.edu/uer/vol6/iss1/9/ )

Jason

I like the premise of your paper - sorry that I didn't read the whole thing. Presumably, stock prices are more likely to fluctuate based on short-term profit opportunities. So, the choice to re-invest profits in technology with long-term benefits is great for the long-term health of the company, but short-term shareholders might prefer that you just pay out those profits as dividends. I cannot imagine the pressure on a CEO to balance short-term profits with long-term planning. I am happy that I work for a very big non-profit that makes lots of money but can reinvest all of its earnings into growth and community benefit.

Ray

The paper suggests that good corporate citizenship is good for business, but I'm not quite satisfied with the authors' dismissal of the reverse causality proposition - i.e., only corporations with strong underlying business fundamentals can afford the luxury of being good corporate citizens. If I understand the arguments correctly (big if), the authors dismiss this possibility on two grounds:

(1) Rational managers won't spend money on good citizenship if it's a pure cost with no concomitant benefit.
(2) Managers are unable to predict business performance well enough to know when their businesses are doing well enough to afford to spend money on good citizenship.

For (1), what about the personal preferences of managers, which they can afford to indulge at some cost when the business is performing well? Maybe there's some threshold of profitability above which the marginal utility of revenue to a manager is less than that of being a good corporate citizen, and the firms that are good corporate citizens are the ones who are above that threshold.

For (2), I'm a little skeptical of their interpretation of the research they cite, which deals with the difficulty of timing share price changes in the put option context. It's not clear to me how it follows that a manager of a business with strong fundamentals can't be confident that the business is going to make enough money to pay good citizenship costs without jeopardizing its long-term health. And even if this is the case, I don't see why a manager couldn't evaluate the risk as one worth taking even in light of the uncertainty, for the psychic-benefit reasons above.

Again, it's quite possible I'm misunderstanding some or all of their arguments - people who actually know what they're talking about are invited to clarify and/or correct.

Read more...

alex in chicago

I like your analysis and would add an actually pretty simple explanation to the correlation:

What if good corporate citizenship is a luxury good and it is a reflection of a successful company with excess capital?

Fred

Regarding that quote from the DOW executive:

A smart company doesn't worry about saving energy for the sake of the planet. A smart company worries about saving energy because it saves money. (And as an added bonus, it means the unwashed complain somewhere else.)

164

Good corporate citizenship is incorporated into the Baldridge criteria for performance excellence. That certanly suggests that the best companies already are adressing this issue.

m henner

I am also a bit suspicious, since executives of companies which are doing well may feel enabled to bask in the public acclaim of doing good.

Another question I have is whether different industries may have different metrics. So I would be interested in seeing oil companies compared with other oil companies, manufacturers compared with other manufacturers, mining companies with other mining companies, etc.

Enter your name...

Usually, when I hear people talking about "supporting the community" or "being a good corporate citizen", the primary metric seems to be whether the business donated enough cash or goods to various fundraisers. It's like they believe that donating a $50 gift card to the owner's kid's school program offsets the negative effects of low wages, sexual harassment, racism, and so forth. I'm glad to see that the UN Global Compact is focused on the bigger issues (anti-slavery, anti-child labor, anti-corruption, anti-discrimination, etc.) instead of donations.

Sceptic

Hi People,
Just a question: what if only companies that are successful in the first place do charity and the charity by itself does not drive value, but other things the successful company does..
Are we looking at the wrong end of the causality?
And Isn't Dow Chemicals the company that is now responsible for "bhopal gas tragedy" and dealing with it's aftermath? Read company statement here: http://articles.economictimes.indiatimes.com/2011-12-03/news/30471807_1_gas-tragedy-union-carbide-india-limited-bhopal-victims
If the markets reacted to this, how would they have responded?
Note: I have not read the papers.

Robert

Is it possible that companies that don't comply with the social standard of good corporate citizenship (and focus entirely on driving growth/shareholder value) are actually reducing value in the eyes of the average citizen (or anyone else who buys their specific products)? Could it be that the bottom line isn't improved by good corporate citizenship, just not reduced?