There is little question that corporate social responsibility (CSR) and sustainability are of growing interest to businesses and investors. In 2011, just under 20% of S&P 500 companies published a sustainability or CSR report. By 2013, just two years later, that number had grown to 72%.
However, in spite of this increased focus, many companies struggle to integrate their CSR efforts into their core mission, strategy, business model and products/services. They also face the challenge of communicating the nature and impact of their CSR initiatives to an often-skeptical audience of employees, customers, investors and even environmental/social activists. At the root of these issues is the conflict — real or imagined — between CSR activities and the holy grail of corporate management: shareholder value. This article examines the factors behind this conflict and suggests ways CSR and shareholder value can be reconciled.
(To simplify this discussion, CSR will be used as the catch-all designation for a company’s sustainability and environmental, social and governance (ESG) activities.)
To better understand the CSR/shareholder value friction, one need look no further than the executives involved.
Fortune 500 CEOs and CFOs are overwhelmingly male; most studied engineering, business administration, economics or accounting as undergraduates; and a majority hold MBAs. The most common paths to the CEO role were finance, marketing and operations, while almost half of CFOs previously held accounting positions. The reasonable conclusion is that a significant proportion of CEOs and CFOs — generally the two executives held most accountable for shareholder value — come from both educational and functional backgrounds built on quantitative and financial analysis, with an emphasis on measurable results.
Comparable data on CSR executives is sparse, partly because there is no common title for the role across companies and partly because in many organizations the positions are relatively new. The information that is available provides several insights.
First, approximately half of the positions are filled by women. Second, the educational backgrounds of CSR executives are less business-focused than CEOs, with fewer MBAs and more degrees in science, the environment and public policy.
Another challenge to reconciling CSR and shareholder value is the metrics used to measure results. Shareholder value has an unambiguous measure: the share price of a company’s stock plus dividends received. In addition, SEC regulations and GAAP and IAS accounting rules proscribe what financial information companies must disclose and how they must disclose it, and comparable requirements exist globally. Revenue, profit and market capitalization are universally understood and clear measures of where a company stands.
On the CSR side, no singular goal comparable to increasing shareholder value exists, primarily for two reasons. First, CSR comprises a wide range of corporate decisions and activities. Consider the following:
Which of these activities are considered good CSR practices? The answer — depending on who you’re talking to – could be some all, or none, and each would be evaluated with its own methodology and metrics. Wikipedia lists 15 CSR “reporting guidelines and standards” that are used globally, each measuring something different and using their own methodology.
The second challenge is that reporting requirements are not consistent. Numerous countries mandate sustainability reporting, including China, Denmark, Malaysia and South Africa, yet research finds that even when required, no common benchmark is employed. Although each year more companies are preparing sustainability reports, we are a long way from consistent disclosure of CSR data by public companies around the world.
To summarize, we have two groups that are very different with respect to their demographics, education and experience. The “language” of their day-to-day activities are distinct, as are their goals and the methodologies and metrics used to measure results.
If CSR is ill-defined, lacking in objective measure and inconsistently reported, can it still be reconciled with shareholder value? I believe the answer is a qualified “yes.” By focusing on those CSR practices with a clear connection to financial performance, the primacy of shareholder value can be maintained without sacrificing analytical rigor. I believe such an approach is not only defensible, but also reflects the way CSR is viewed today by practitioners in many corporations.
Basic finance theory says a company’s share price is simply the present value of expected future cash flows. In this framework, CSR activities create shareholder value if they increase future cash flows (profits) or reduce the risk of those cash flows. In today’s environment, many CSR activities can directly improve financial performance by reducing costs, increasing revenues or reducing risks.
Working together to identify and implement such strategies is a logical starting point to bridge the CSR/shareholder value divide. If CSR executives better understand how certain initiatives impact financial performance and presumably share price, they will gain a new lens through which to evaluate CSR proposals. At the same time, having CEOs and CFOs work closely with CSR executives to make connections – even tenuous ones – between CSR activities and profitability/risk will give the CEOs and CFOs valuable insights into the way their colleagues think about their responsibilities and overall place in corporate strategy. Over time, I believe this approach will bring the two sides closer together and produce significant gains for both.
To facilitate this, I propose three categories for CSR activities: cost-saving, revenue-enhancing and risk-reducing. The delineation is not always clear, and some CSR may fall across more than one category. The table at the left places these activities on a spectrum based on how directly each impacts shareholder value.
The best way to understand this approach is to look at examples and the experiences of real companies.
The simplest way to increase profits is to reduce expenses. Examples of direct cost reductions from CSR activities include a restaurant purchasing locally grown, in-season produce that is cheaper than the offerings of its usual distributor, or a company switching to cleaner and cheaper energy alternatives. Facebook’s recently opened, 476,000-square-foot data center in Altoona, Iowa is almost entirely powered by wind energy, which supplier MidAmerican Energy calls the “lowest-cost energy source” available.
Indirect cost savings can be found in the way companies package their products. Environmentally friendly packaging design can reduce material requirements, cut shipping and warehousing costs, and lead to more recycling. For example, Procter and Gamble’s redesign of the Folgers coffee container reduced plastic consumption by one million pounds annually.
For many firms, the goal of CSR is to increase revenue. Revenue can grow by selling more or selling at a higher price. Consumers may pay a premium for socially responsible products for many reasons. In some cases, they believe the products are superior. For example, some consumers believe organic produce and free-range meats are healthier and taste better, which justifies a higher price.
In others cases, the products are of equal quality or functionality, but have been sourced in a more environmentally friendly manner or provide social or environmental benefits in use. FSC-certified lumber is indistinguishable in its use from non-FSC lumber, but it has been harvested sustainably. The electricity from a wind turbine is identical to that from a coal plant. However, generating the former does not produce CO2 or contribute to global warming. The Prius does not drive better than other cars, but it does have a smaller carbon footprint in use.
To create shareholder value, companies just need to make sure the revenue premium offsets any additional costs and maintains profitability.
Even if it requires new investment or additional expense, a reduction in risk can increase shareholder value. The risk reduction can come via CSR activities that help the company avoid regulation, taxes or fines – all which reduce cash flow.
Risk can also be mitigated through activities that protect or repair the company’s reputation. When threatened with new taxes and outright bans on sugar-laden drinks, the American Beverage Association launched an ad campaign touting the removal of full-calorie soft drinks from school vending machines. Kevin Keane, senior vice president of public affairs at the American Beverage Association, summarized the industry’s perspective as follows: “You’re always in a far better position to be on offense than on defense all the time, and our companies recognize that and are doing bold things in the public policy arena that others will follow.” Similar initiatives are being undertaken by the fast-food and snack industries.
Walmart, whose corporate citizenship has been questioned extensively, has used CSR activities to offset some of this criticism and to enhance its reputation with both investors and customers. Often portrayed as a ruthless, only-costs-matters behemoth, Walmart scored big reputational points in the aftermath of Hurricane Katrina. The company used its considerable logistics expertise to get water and food to the victims, often using drivers and managers to personally deliver the donated items. The media images of this were hard to square with the image of Walmart as a cold, uncaring corporate giant. When the company introduced its $4 prescription program in 2006, the savings to its employees and customers — many of whom are elderly and/or poor — were both immediate and substantial. It also offset some of the substantial criticism of Walmart’s policy of not providing its employees with health benefits.
Awareness of and concern about sustainability and CSR is increasing for both consumers and companies. For companies, the question is how to manage CSR issues and create shareholder value at the same time. This challenge is exacerbated by the contrasting backgrounds of CEOs/CFOs and CSR executives and the fact that they use different language, benchmarks and reporting standards to measure performance.
This article attempts to reconcile these differences by proposing a framework and specific ways the two camps can work together. The strategy allows both to achieve their main objectives, but also suggests that by collaborating, both can achieve more. Effectively implementing such an approach will ultimately benefit the company, its shareholders and other stakeholders, and society at large.
Richard T. Bliss is a professor of finance at Babson College. This article is based on ongoing research conducted as part of Project ROI, a partnership between Verizon, Campbell Soup Company, Babson College and IO Sustainability.