David Moll, for the Haskayne School of Business
Aug. 21, 2019
Corporate social responsibility pays off for companies, Haskayne researcher finds
A desire to do good deeds isn’t the only reason corporations are collectively spending billions of dollars to be more socially responsible, says the associate dean for research at the Haskayne School of Business.
“That’s the idea behind charity, but this is not charity,” says Dr. Yrjo Koskinen, PhD. “There is, of course, some altruism involved in this, but corporations don’t do this in order to be nice guys. They do this in order to maximize their long-term profitability.”
Koskinen is the co-author of a recent study that looked into how corporate social responsibility initiatives affect the financial bottom line of companies. These can range from Starbucks’ ethically sourced or fair trade coffee to Apple’s commitment to use 100 per cent renewable energy.
“Twenty years ago, people were not aware they wanted things such as ethically sourced coffee,” says Koskinen, who is also a professor of finance at Haskayne. “Consumers have changed, and companies have changed in response.”
Initiatives boost loyalty
The study, which was published in Management Science, used a mathematical model to look at the financial impact of such initiatives on companies. It partly found they are simply another way to make a firm or its products stand out in consumers’ eyes from its competitors, says Koskinen.
“You might build luxury cars, but go a step further and build an environmentally friendly car — for example, a Tesla, which has very loyal customers,” he says.
“But it is only profit maximizing if only a fraction of the other firms follow the strategy. If everyone follows it, it’s not going to work anymore.”
As a result, such initiatives favour early adopters, says Koskinen. “It’s a race between companies adopting it and consumers wanting it,” he says. “The more consumers want such activities, the more firms are going to provide them, but there is always a diminishing return.”
The study found the key to corporate social responsibility initiatives is whether they create consumer loyalty. “When your customers are more loyal to your product or your company, your profits fluctuate less over the business cycle, and you can also better judge your profit margins,” says Koskinen. “You can afford to raise your prices and your customers are not going to switch to another company.”
Such initiatives can not only help insulate businesses from the ups and down of the market, they can also boost the total value of such firms by as much as four to five per cent, he says. For a $10 billion, multinational company, it could mean a difference in valuation as high as $400 million to $500 million, says Koskinen.
Advertising seen as vital
The stability created by such initiatives can make corporations less risky for investors, in turn reducing the risk for companies when they need to raise money by selling shares, he says. “It increases profits and increases corporate valuation because the cash flows become less risky, and it decreases your cost of equity, which is the compensation you have to pay shareholders,” he says.
One thing that surprised Koskinen was the importance of advertising. “The relationship is the strongest when you interact corporate social responsibility with advertising, which means that you in effect must tell your story to your customers,” he says. “If they don’t see it as a story, the customers don’t know how to appreciate it.”
But it is ultimately consumers who must judge the sincerity of such efforts, says Koskinen. “There are a lot of companies out there who are trying to fool people,” he says. “If consumers really want to effect change in corporate behaviour, they have to be able to see which companies are really serious about it and which ones are just using this as a PR strategy.”
Besides Koskinen, the study was co-authored by Dr. Rui Albuquerque, PhD, a professor and Haub Family Faculty Fellow at the Carroll School of Management at Boston College in the U.S.; and Dr. Chendi Zhang, PhD, an associate professor of finance at the Warwick Business School at the University of Warwick in the U.K.