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Does it pay to be a good corporate citizen?

corporate_social_responsibility-mainOnce upon a time, making a profit was all that mattered for most companies. Now, being a good corporate citizen is just as critical, but do the two go hand in hand?

“Being good is good business,” according to Anita Roddick, British founder of The Body Shop.

An admirable thought, but the latest research from LSE and the London Business School shows that having a social conscience and behaving ethically in business does not improve the bottom line unless you shout it to the roof tops.

Customer awareness is the key, says Dr Ane Tamayo, a lecturer in accounting at the London School of Economics and Political Science.

A lot of companies are investing in corporate socially responsible (CSR) activities but does it pay off for shareholders? Only if a company advertises heavily it appears.

“With firms who are big advertisers and have strong brand recognition, investing in CSR activities certainly increases the company’s value,” Dr Tamayo says.

The bad news? Those companies using CSR to turn around a poor reputation will be waiting a long time before they see the benefits on their balance sheet.

Customers are sceptical by nature and firms that have a history of bad practices can even experience a backlash from the market if they jump on “the good corporate citizen” bandwagon and expect to see profits flow overnight. If the actions don’t align with the reputation, the outcome can be disastrous for businesses.

Also, firms with a low advertising budget need to accept that however socially and ethically responsible they are, the impact of their CSR activities will be negligible.

It raises the question about whether being a good corporate citizen is value for money, especially when it comes to shareholders.

What does CSR mean, anyway? For research purposes, Dr Tamayo has adhered to the following definition: “the commitment of a business to contribute to sustainable economic development, working with employees, their families, the local community and society at large to improve their quality of life”.

CSR activities are costly and firms need to carefully consider the investment from a shareholder’s point of view.

“There is growing evidence that some shareholders actively seek out companies with positive CSR activities but if people do not get a return on their money they will soon stop investing,” Dr Tamayo says.

Her research has not found a link between CSR and the quality of a product, but there is some evidence to show that people are willing to pay a little bit more for products that are economically sustainable.

“The bottom line is that if you are a good guy, being highly visible and promoting the ‘clean corporate citizen’ line pays off for shareholders. If your reputation was bad to begin with, letting people know you are now engaging in socially responsible activities could actually spell disaster – your profits could go backwards,” Dr Tamayo says.

Useful links

The Impact of Corporate Social Responsibility on Firm Value: The Role of Customer Awareness is| co-authored by Professor Henry Servaes and from the London Business School and Dr Ane Tamayo from LSE. It was published in Management Science|.

Dr Ane Tamayo| is a lecturer and researcher in the Department of Accounting at LSE and has been the recipient of a number of awards as well as holding positions on the editorial boards of the European Accounting Review and the Journal of Business Finance and Accounting.

Posted August 2013