Finance

Being socially responsible under peer pressure

June 22, 2015

Committing to corporate social responsibility (CSR) activities may help reduce firm risk. However, such an impact is only observed when firms are under a high peer pressure. In this case, firms proactively engaged in CSR benefit from a lower firm risk. On the contrary, committing to CSR activities under a low peer pressure does not result in a significant impact on reducing firm risk.

Beeld: © Nationale Beeldbank 

Many firm managers and stakeholders consider firm risk as a crucial indicator reflecting firms’ performance, because firm risk is directly related to the chance of corporate decline and mortality, especially when the harsh times are predicted to come or when organizational change takes place in a firm. Scholars in management often argue that committing to CSR activities help firms reduce their risks. Here, CSR is defined as a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with stakeholders in a voluntary basis. The risk reduction impact of CSR is due to the following reason: Committing to CSR activities creates a moral capital for the firm and acts as “insurance-like” protection when negative events occur. For instance, firms proactively engage in CSR activities may not be disturbed by regulatory intervention, while others may be involved in the lawsuits against environmental polluters as a result of low CSR.

However, firm managers and financial analysts usually consider CSR activities as a potential reason for increasing firm risk due to the non-negligible costs imposed on a firm and the uncertain future related to such activities. As a consequence, committing to CSR activities might be penalized by the market which leads to more fluctuation in firms’ financial performance.

Empirical studies aiming at investigating the relation between CSR and firm risks do not provide a conclusive answer either. The conflicting findings in empirical studies urge to clarify the conditions under which the impact of CSR on firm risks exists.

My research identifies the institutional norm, indicated by the level of peer pressure with regard to CSR in an industry, as such a condition. Here, I consider peer pressure as whether a given CSR activity is widely undertaken by peer firms in the same industry. If that is the case, it may change the attitudes or behaviors of the objective firm towards its CSR activity.

If a CSR activity is under high peer pressure within a given industry, committing to such an activity is regarded as the efforts of a firm to achieve legitimacy—the generalized perception that the commitment of a firm is desirable and appropriate in the social system. Given that meeting and adhering to the expectations of a social system’s norms and values are vital in this industry, firms engaged in CSR activities under a high peer pressure may be characterized as having good relations with a variety of stakeholders, in particular, the secondary stakeholders—who are not essential for the survival of a firm or engaged in the transactions with a firm, but nevertheless may influence or are influenced by it. In the modern era, a firm’s endeavor to serve the interests of its shareholders has become increasing depending on the support of the secondary stakeholders. Therefore, by addressing the concerns of the secondary stakeholders proactively, firms with more CSR activities under high peer pressure are more likely to bear a lower fluctuation of business performance, i.e. a lower firm risk.

On the contrary, if a CSR activity is not undertaken by a large number of firms in a given industry, firms committing to such an activity in this industry are regarded as taking a strategic position to distinguish amongst their counterparts and to enhance their corporate reputation. As a consequence, the engagement in CSR activities under a low peer pressure reflects the relative standing of a firm, rather than its willingness to meet a social system’s norms and values. Such a commitment, may not lead to a lower risk of a firm, because it is not perceived as a key to achieve legitimacy. In particular, if the CSR commitment is communicated in implicit messages, it may even result in ambiguities among the stakeholders’ perceptions. Therefore, committing to CSR activities under a low peer pressure is unlikely to help firm reduce its risk.

Nevertheless, such a commitment may support firms in other aspects. For instance, it may be characterized as a sign of the firm’s willingness to take risk, in order to gain a distinct position. Consequently, it may help the firm to attract risk-seeking investors. 

Through identifying institutional norms as an important condition, my research helps clarify the impact of CSR on firm risk. Further, it provides firm managers with a couple of managerial implications. First, to acquire a comprehensive understanding of the potential outcomes of a CSR strategy, firm managers should take institutional norms into account. Second, by undertaking CSR activities with a high peer pressure, managers can anticipate the CSR efforts being translated into lowering firm risk. Last but not the least, if firms intend to take relatively risky positions for value gains (e.g., reputation enhancement), committing to CSR activities with a low peer pressure may contribute to earning the firm desired distinctiveness. 

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