United States: Unlocking The Business Value Of CSR Programs

CSR in a Nutshell

Globalization has dramatically expanded the operating scope and rights of multinational companies as a result of such things as multilateral trade agreements, bilateral investment pacts and domestic deregulation. Corporations going global, however, have also discovered an unexpected quid pro quo: that "along with expanded rights have come demands that [they] accept greater global social responsibility - led not by governments, or in the first instance, international organizations, but by civil society organizations," including transnational social movements, coalitions, and activist campaigns. John G. Ruggie, Reconstituting the Global Public Domain: Issues, Actors and Practices 19 & 36 n.1, Faculty Research Working Papers Series, Kennedy School of Government (July 2004).

Corporate social responsibility (CSR) programs and related reporting are one of the more recognizable outgrowths of this dynamic for transnational companies. Critically, CSR has evolved over the past decade or so to:

Beth Kytle and John G. Ruggie, Corporate Social Responsibility as Risk Management: A Model for Multinationals 9, Corporate Social Responsibility Initiative, Kennedy School of Government, Working Paper No. 10 (Mar. 2005).

CSR basically conceptualizes corporations as accountable to a wide array of stakeholders for the footprint of their business operations on society at large. Largely as a result of transformative changes in the global political order over the past quarter century or so, multinational corporations today are expected to respect the rights and dignity of stakeholders affected by their operations (e.g. employees, suppliers, local communities), and to remedy any adverse effects they have caused or to which they have substantially contributed. It is a basic expectation laid down by the UN Guiding Principles on Business and Human Rights (UNGPs), with all sorts of implications for firms in terms of goodwill, reputation, legitimacy, risk, and the bottom line.

For certain companies listed in Europe, and issuers registered with the SEC operating in the oil, gas or minerals sectors, CSR reporting is not an option: it already is or soon will be mandatory. See, e.g., EU Council Directive on the Disclosure of Non-Financial Information (Sept. 29, 2014); 15 U.S.C. § 78m(q) (Dodd-Frank's conflict minerals rule). Others must determine whether there is sufficient business value to be leveraged from voluntary CSR reporting to make it worthwhile. Uncertainty on this score has led many to question CSR's value given the costs involved (in terms of data collection, resource diversion, and otherwise), whereas others have viewed CSR as a subject too far removed from the core business of the organization to merit serious attention, or harbor doubts about the willingness of investors to reward socially responsible companies.

To be sure, some degree of skepticism about CSR was warranted by the ambiguity of the early evidence, which until recently failed to consistently demonstrate a positive correlation between CSR programs and economic outcomes. While the balance sheet is quite obviously a paramount consideration, firms that look at CSR only through the lens of corporate pro bono or philanthropy (or public relations), rather than as a new and potentially more effective way of doing business, are failing to see the bigger picture. Among other things, CSR programs can be a valuable business tool for managing risk more efficiently and effectively - on a proactive as opposed to a reactive (or crisis-management) basis.

Evidence for the Business Benefits of CSR

CSR raises important questions. Do investors care about CSR? Does CSR create value? The answer to each question appears to be, yes.

More recent econometric studies are sharpening the picture, shedding welcome light on these questions. In addition to revealing that investors and other stakeholders care about CSR disclosure, this evidence is empirically linking CSR investment to a variety of positive economic outcomes, such as higher share prices, higher firm values, lower capital costs, and better analyst forecast accuracy. See, e.g., K. Yu, S. Du, & C.B. Bhattacharya, Everybody's Talking But Is Anybody Listening? Stock Market Reactions to Corporate Social Responsibility Communications (Aug. 2013) (Yu et al.); C. de Villiers & A. Marques, CSR Disclosures: Predispositions and Consequences (Jan. 2013) (De Villiers & Marques).

Each of these studies significantly advances the literature by "unlock[ing] the business value" of voluntary CSR reporting on a quantitative basis, demonstrating a positive association between CSR disclosures and higher share prices, under certain circumstances. Yu et al.'s methodology included "an event study" to capture real-time, short-term market reaction to the release of CSR reports. The study by De Villiers & Marques, meanwhile, examined the content of CSR disclosures by 500 European firms and market factors "to gain a better understanding of the conditions where CSR disclosures are linked with positive economic performance." This research demonstrates that CSR has the capacity to deliver demonstrable business value.

More specifically:

• Yu et al. "find positive cumulative absolute abnormal returns and positive abnormal trading volume around the release dates of CSR reports, suggesting that investors do revise their expectations of future cash flows or risks of a firm based on the information released in its annual CSR reports." Using multivariate regression analysis to link positive abnormal returns to both CSR reporting and CSR performance, their research "provides rigorous evidence that CSR performance leads to enhanced financial performance."
• De Villiers & Marques "find that higher levels of CSR disclosures are associated with higher share prices," and that share-price gains are more strongly associated with higher levels of

CSR disclosure "in countries with more democracy, more government effectiveness, better regulatory quality, and more press freedom."

The results of another cross-country study, not yet published, similarly connect CSR with higher profits, showing: "that firms with higher abnormal (unexpected) CSR disclosure have higher firm value across various categories and firm types, suggesting that CSR concerns are persuasive and that CSR disclosures play a significant role in firm value." See D. Jeter, S. Cahan, V. Naiker, C. Van Staden, and C. de Villiers, Are CSR Disclosures Value Relevant? Cross-Country Evidence (paper-in-progress).

(Access to these studies is available here, here, and here.)

Three Practical Implications and an Imperative

The empirical evidence on CSR's value relevance is encouraging. To fully maximize its business value, however, multinational enterprises should ideally approach CSR programs as a form of risk management tied to core business operations - more particularly, as a way of assessing and managing the "social risk" inherent to the dynamics of today's global economy. As Professor Ruggie explains in Corporate Social Responsibility as Risk Management:

[This] requires understanding three premises. First, CSR is a natural extension of going global analogous to other adjustments of 'scaling up' (e.g., forming strategic alliances, finding skilled staff in foreign countries). Second, CSR activities are not discretionary expenditures or the target of cost-cutting activities. Third, CSR must be linked strategically to core business functions to reap the full benefits.

Seen in this light, CSR is a business imperative. This is true not just for companies, but for their lawyers too, who must recognize that beyond the risk of legal actions in courts around the world, their clients are also subject to the often harsher judgments and sanctions of "judges" in the "court of public opinion." Careful attention to CSR can be a way to avoid and mitigate that risk.

Finally, given the continued proliferation of reporting requirements, those looking for clarity about what good reporting on CSR performance looks like should consult the recently issued draft UN Guiding Principles Reporting Framework ( here), which offers comprehensive guidance on what is meaningful to report publicly, in line with the UNGPs. This reporting framework is a work-in-progress that will be further refined and finalized by the end of 2015, based on stakeholder feedback and learning from pilot projects being conducted by various companies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.