This article discusses the current shift toward CSR (Corporate Social Responsibility) and CSR initiatives, the mistakes companies are making today and the elements that good CSR initiatives have in common. For more information on company reporting of CSR-related information, see our article about ESG Reporting.
Shift to the Present View on CSR & CSR Initiatives
Morality and ethics have been contemplated by humans for generations, with philosophers wondering what obligations each person owes to other people and to the larger world around them. This question persists, but its implications extend beyond the individual to businesses and corporations as well. The discussion of this topic is integral to the conversation around corporate social responsibility.
The prevailing answer to the role of companies in creating a better society has shifted over the years. In the past, due to the logic of prominent economists such as Milton Friedman, most executives focused solely on creating value for shareholders and on increasing profits.1 This stock price and reported profit focus can cause company managers to be attracted to unsustainable tactics that create short-term increases in stock price, rather than focusing on the variety of responsibilities that are crucial to building a long-term, sustainable business that creates long-term value for shareholders and all of a company’s other stakeholders such as customers, suppliers, employees, and communities. Over the past several decades, investors and society as a whole have started to shift to more of a long-term stakeholder view of creating value as a company; this view is called Stakeholder Theory. Today, the attitude of Stakeholder Theory2 continues to become the prevailing attitude among many prominent corporate executives, investors, and everyday people.3
The movement to Stakeholder Theory has become so great that The Business Roundtable (BRT)—an association of CEOs of large U.S. corporations—has stated that corporations should exhibit a commitment not only to shareholders but also to employees, customers, suppliers, and local communities. This statement has been signed by 243 major corporations as of July 2021.4
Stakeholder Theory suggests that CSR initiatives are opportunities for companies to generate material benefits that can help benefit the company’s bottom line as well as other stakeholder groups. Research shows that “The stakeholder theory is directly linked to long-term profitability and sustainability and provides a better perspective in managing corporations.”5 A good CSR initiative not only helps a company’s stakeholders and the surrounding communities but also the owners of the companies themselves.
Mistakes and Poor Corporate Responsibility Initiatives Today
Not all CSR initiatives are created equal; some are much more effective than others. Todd Manwaring, Director of the Ballard Center for Social Impact at Brigham Young University, mentioned in an IPOhub interview how many CSR initiatives are done poorly. One phenomenon he mentioned is “greenwashing.” In its strictest sense, greenwashing is when companies falsely communicate the extent to which a company or its products are environmentally friendly in order to tap into the market’s growing desire for green products and companies. However, the phenomenon of companies dishonestly appealing to impact-conscious markets occurs in all categories under the CSR umbrella. A second tendency Manwaring noted is the tendency for companies to try to appear to “do good,” or benefit society, without verifying that what they are doing is working. He gave a hypothetical example of a company with the goal of providing meals to an impoverished community. Many companies, he explained, will often report that, say, 5,000 meals were given. However, no additional information was gathered by the company. Many people who dig deeper wonder whether the meals got to the region they were meant to reach and if they got into the hands of those who needed them most. Without additional information, companies and those outside the firm alike do not know how much good has been done, if any at all. Companies serious about CSR need to launch initiatives with proper accountability metrics to measure the benefit of the CSR initiative. One way of doing this easily is to align with an existing impact framework such as the UN SDG, IRIS GIIN, and more.
Qualities of the Best Corporate Responsibility Initiatives
In addition to the interview with Manwaring, IPOhub also interviewed Brent Goddard, Adjunct Professor in the Ballard Center for Social Impact and former NuSkin employee. Goddard was involved in the company’s social responsibility efforts. Both Manwaring and Goddard pointed out that there are common threads within CSR initiatives that avoid the aforementioned mistakes and strive to address societal ills, all while generating strategic and material benefits for the firm. Of course, there are exceptions to everything. Companies can and often do step outside of best practices when there are strategic reasons for doing so. Nevertheless, these best practices can help a company improve the quality of its CSR initiatives. First, successful CSR initiatives tend to be “core to the business.” This expression alludes to factors such as (1) how focused the company is on the initiative, (2) how related to the core competencies, operations, and routines of the business it is, and (3) how connected the beneficiaries are to the company.
- Focus within the company on the initiative: Often, well-integrated initiatives need to be planned and integrated at a high level of the company requiring involvement from executives and the board. Executives need to be committed to the plan to keep themselves and those they lead focused on the initiative. Those who are focused are more likely to give the initiative the work it needs to become a sustainable program and succeed.
- Relationship between the initiative and the company’s core competencies: Successful initiatives often have a connection to the regular operations or competencies of the company. One reason for this is because companies can leverage their unique skills to make a large effect on society. Another reason, more specific to connecting the initiative to operations, is because it’s easy for companies to identify initiatives that will benefit society and themselves simultaneously. For example, Nike received major backlash from the public for using sweatshops and child labor to manufacture its products. Nike responded partly by enacting initiatives to eliminate unethical labor sources from their supply chain. By addressing a concern related to its operations—its supply chain—Nike began repairing reputational damage while also taking a stand against unethical working conditions.
- Relationship between the beneficiary and the company: Successful initiatives tend to serve stakeholder groups or other related entities rather than unconnected groups. The key reason for this is because companies often rely on stakeholder groups in some way that is materially important to their business. Such groups could include but are not limited to, customers, employees, investors, and lenders, and so forth. By benefitting stakeholder groups, companies can protect the stream of benefits they receive while doing good to others. Returning to the Nike example, the target group of Nike’s initiatives against unethical labor was primarily its employees who make the creation of products possible.
Second, successful CSR initiatives are quantifiable for people’s lives. As much as 90% of S&P 500 companies publish sustainability reports, but fewer are able to provide quantitative reports on the true impact their CSR initiatives have on people’s lives. To provide better reports, companies need to track outputs, outcomes, and impact (often referred to as CSR metrics).
- Outputs: Outputs are the easiest to identify of the three metrics. In fact, many companies typically already gather this metric as it is the apparent result of the initiatives.
- As an example of an output metric, consider a company that has the initiative to deliver laptops to low-income students. The straightforward output metric is the number of laptops given to those target students.
- Outcomes: Outcomes are a deeper metric. These metrics look at the people that benefitted from the initiative and what the initiative did to solve the societal problem targeted.
- An example of this is a company that builds a school to teach children to read and write. The outcome is that the children are literate.
- Impact: Impact is perhaps the hardest metric to measure. These metrics examine to what extent the outcome of the initiative resulted in the betterment of its impact. This can be done by comparing the area that received the benefits of the initiative to an area that didn’t, or this can be done by doing a controlled blind test. This metric can be difficult and expensive to track but doing so can reveal to the company and the public the true benefits the initiative has on people’s lives.
- Continuing from the example described under “Outcomes,” the impact would be how the children’s lives were changed because they are now literate. This can be done by determining whether they get better jobs, are healthier, and so forth.
The difference between outcome and impact is often confused. Outcomes basically answer whether the initiative solved the social problem it was designed to tackle. One example of this is The Other Side Academy and how they help people get out of the lifestyle of addiction and repeat jail sentences. Their outcome is that they take people who have, on average, been to prison 25 times and teach them life skills along with a livelihood. The impact, however, is a long-term result such as the person now having a family, a stable career with savings, and positive involvement in society. Those long-term measurements are why impact metrics are both difficult and expensive but also the most rewarding metrics to track.6 When gathered successfully they can lead to true change, future backing, and greater impact.
The rise of Stakeholder Theory has brought corporate social responsibility (CSR) to the forefront of corporate consciousness, and CSR initiatives are an important part of a company’s CSR strategy. Such initiatives are often executed poorly, but businesses can learn to create and sustain successful CSR initiatives by learning the best practices in their industry. Business leaders can then incorporate those elements into their own initiatives in order to take full advantage of the opportunity CSR initiatives offer to benefit both the company and society.
Special thanks to Todd Manwaring and Brent Goddard for their time and insights.
- “Stakeholder Theory is a view of capitalism that stresses the interconnected relationships between a business and its customers, suppliers, employees, investors, communities and others who have a stake in the organization. The theory argues that a firm should create value for all stakeholders, not just shareholders.” — http://stakeholdertheory.org/about/