I wonder if you’ve determined why firms decide to become socially responsible?

My research shows that there are three reasons. First, it just makes good business sense. A firm that is socially responsible builds trust with its employees and other stakeholders. Fortune magazine, for example, does a survey in which it evaluates the reputation of companies based on a number of dimensions, including social responsibility. The Globe and Mail also does a survey in which it judges the best companies to work for. Companies participate in these surveys because, if they are evaluated favorably, they know they can attract better employees. Furthermore, studies have shown that there is a relationship between a firm’s reputation and its share price. So, if firms are evaluated favorably, it reflects well on their reputation, which is related to their share price. The second reason to be socially responsible is simply that ” if everyone else is doing it, then, we should too.” Firms don’t want to step out of line, to attract bad publicity, to appear irresponsible. Talisman Oil attracted considerable attention for what were perceived to be its irresponsible actions in the Sudan. More recently, Exxon has taken some heat for its activities in Indonesia. Firms don’t want this kind of scrutiny. They want to remain below the veil of publicity. To do that, firms don’t need to exceed stakeholder expectations, they just need to meet them by keeping in step with their peers.

The third reason is that there’s sometimes an influential person in the organization, often on the top management team, who really cares about these issues and sees an opportunity to make the way the company is run as an extension of her or his commitment to society. This happens more often in privately held organizations, where one, or a few, individuals can hold great power. For example, Ben Cohen and Jerry Greenfield, created Ben and Jerry’s Ice Cream, and they were able to espouse social responsibility as an important part of the organization’s values.

Is there a company out there that is a paragon of corporate social responsibility?

There are a number of agencies that rank firms based on their corporate social responsibility, and a number of mutual funds that include only firms that meet their standard of social responsibility. Fortune’s Reputation Index and the Dow Jones Sustainability Index are two examples.

It’s interesting to note, however, that only a very few companies really tout their “responsible” activities. In a study I did of food retailers in Britain, the company that was significantly more committed to environmental responsibility was unwilling to market its commitment to its customers. While managers were confident that they were doing the right thing, they knew that the company was far from perfect. If they advertised how much they had done, managers believed that the media would focus on what the company hadn’t yet done.

Look at what happened to The Body Shop. Jon Entine wrote a scathing article in Business Ethics Magazine in 1994, saying that The Body Shop was misleading consumers. He claimed that The Body Shop’s ethical platform was hype and that the company engaged in many questionable activities. This precipitated a spate of bad publicity against The Body Shop. Its stock price fell soon after and it has never fully recovered. People still question whether The Body Shop’s commitment is all hype.

Some firms actually aren’t socially responsible. Why is that?

 That is a very good question, and one that I’ve tried to research. It is, after all, easier to figure out why firms do something rather than why they don’t. You could actually reverse the reasons I gave for being responsible and say “Well, there’s no economic motivation to do so,” or “Nobody else in the industry was doing it,” or “There was no leader in the organization that cared.”

However, firms may not be responsible for different reasons. For example, my research shows that firms don’t ‘see’ the issues or that the issue doesn’t make it onto senior management’s agenda. There are two reasons for this. First, individuals in the organization may not be concerned about the issue. If no one is concerned, then people can’t see the problems or they won’t care enough to bring them to the attention of senior management. Second, an organization must endorse social responsibility and make it a part of its value system. An organization’s values are often reflected in its mission statement or annual report, or even its internal propaganda. And employees will respond. For example, if an employee is developing a new printer, and she knows that her organization cares about the environment, she will include features that reflect that value. This was exactly what happened when Hewlett Packard started to recycle its toner cartridges. Employees are more likely to ‘see’ the issue and get it placed it on the organizational agenda if they believe that the organization will respond to their efforts.

What are the business benefits of being socially responsible?

A lot of managers ask, “If we are socially responsible, will customers be willing to pay more for our product or will our investors pay more for our stock?” As I indicated earlier, a socially responsible firm is more likely to have a good reputation, and there is a correlation between reputation and stock price. However, it is difficult to determine conclusively whether there is a direct relationship between corporate social responsibility and revenues or stock price. After all, there is usually some cost to being socially responsible, such as engaging in philanthropic activities in the local community. The question is whether the benefits exceed the costs. Most of the benefits of social responsibility are subtle and diffuse, manifested by greater employee, customer and local community commitment, and it is difficult to find a measurable financial return. But, this stakeholder commitment generally means less risk for the firm, something that translates not into a higher share price, but less volatility in the firm’s stock performance. I studied the relationship between a company’s environmental responsibility and its stock price. Firms that were considered environmentally responsible experienced less unsystematic risk over a prolonged period of time. Their stock prices were less likely to incur significant shocks that did not mirror the market’s overall moves. It is possible to infer, then, that these firms are either less likely to incur, for example, oil spills or public relations crisis, or if they do, their share price will be affected less than the share prices of those firms that are considered less environmentally responsible.

This is important because it shows that while a firm may not necessarily see an increase in its stock price over time, it will actually be able to remain in business over a longer period of time. Its survival will likely be less threatened if it has a major disaster. And there’s a simple reason for it. These firms build greater loyalty and commitment from their stakeholders.

Is it more important that a company be socially responsible today than ten years ago?

Absolutely. First of all, because we can communicate with everybody worldwide, I now have better knowledge of what Talisman is doing in the Sudan. It becomes much harder for it to continue to be irresponsible. Secondly, over the last decade we’ve become much more of a knowledge-based society, and the thing that distinguishes a high achieving firm from others is often its ability to manage knowledge. The firms that manage knowledge the best, especially the type of knowledge that gives them a competitive advantage, are those whose employees are empowered and willing to work as a team. These employees are looking for more than a competitive environment in which they are rewarded financially. They are looking for an environment that breeds cooperation, good will and trust. If the firm is committed to society and its employees, these same employees will return that commitment to the firm.

Is being socially responsible more important for certain types of firms?

In my research, I have focused primarily on resource-based companies that are in primary goods-producing industries, for example, chemical and forestry companies, oil and gas and mining companies. There’s no question that being socially responsible is more important for them than it is for companies in some other industries. This is because of their heavy impact on the land and local communities. Today, we’re seeing a lot more cooperation among these companies to build industry standards, rather than relying on government to impose regulations. By participating actively in setting industry standards, these firms are often able to pre-empt cumbersome and often inequitable government regulations. It’s great to see this happening, because it brings up the laggards, and to some extent pulling up the laggards is more important than having a few firms excel.

The term “triple bottom line reporting” has become part of our vocabulary. What does it mean and is it different than social responsibility?

Triple-bottom-line reporting operationalizes corporate social responsibility. It requires firms to report the financial, social and environmental impact of their operations. Normally, when a firm goes through its annual planning cycle, it quantifies all of its financial interactions. But, the triple bottom line requires that the firm not only quantify its financial assets, but also attempts to put a value on its social assets and natural resources. Through this procedure, firms get a better sense of their impact on society and their real value or liabilities. Such reporting helps employees take a longer-term perspective of the firm. And, if you believe that social assets and natural resources are inextricably tied to the financial assets, employees will often develop new products or processes that could provide the firm with a competitive advantage.

However, triple bottom line reporting is not without its problems. For example, how does one quantify the firm’s intellectual capital? When a firm loses a key scientist to a competitor, by what amount should the value of intellectual capital be adjusted?

Changing corporate mindsets to recognize that social responsibility is relevant to firms and their survival is difficult. We are caught in this age-old dilemma that if it’s the right thing to do, then it must cost money. However, there are numerous intangible benefits associated with corporate social responsibility. Until managers can measure these intangible benefits, corporate social responsibility will always be considered a marginal activity rather than a core value.