What if financial stakeholders care about some CSR, but not others?

October 23, 2014

Firms in various industries have become more and more active in engaging in corporate social responsibility (CSR). However, CSR imposes non-negligible costs on a firm which may hurt a firm’s short-term financial performance. As a consequence, not all these activities will be appreciated by the financial stakeholders. Some CSR may be regarded as unnecessary expenses rather than benefits to a firm. A recent study by Dr. Yijing Wang and Dr. Guido Berens shows that the financial stakeholders think positively about the legal CSR, indifferently about the Philanthropic CSR, whereas negatively about the ethical CSR related to communities or the environment.

The impact of CSR on financial stakeholders is reflected by how CSR influences the perceptions among them. These perceptions, namely, corporate reputation among financial stakeholders, are a result of evaluations regarding the likelihood that a firm can meet its expectation. A good corporate reputation can help resolve the information asymmetry problem between firm mangers and the financial stakeholders, and consequently benefit the financial performance of a firm in the long run. Therefore, to understand the impact of CSR on financial stakeholders, a key step is to investigate the financial reputation.

Another important step, then, is to categorize CSR activities into specific groups. The classification is based on the degree to which different expectations among stakeholders are fundamental to a firm’s role in society, which includes the legal, ethical and philanthropic responsibilities. Legal CSR refers to respecting the laws and regulations that a firm must adhere to. Ethical CSR corresponds to the expectation of society that firms should carry out their business within the framework of social norms. Ethical CSR is not necessarily codified into law. Philanthropic CSR refers to voluntary activities, such as philanthropic contributions, about which society has no clear-cut message for business. Through this classification, Wang and Berens’s study finds that legal CSR is an important determinant of reputation among financial stakeholders. Financial stakeholders perceive the commitments to legal CSR positively. On the contrary, the ethical CSR related to secondary stakeholders, such as communities or the environment, are perceived negatively among financial stakeholders.

Do other stakeholders perceive CSR in the same way?

These intriguing findings pose another question: are the financial stakeholders really so special, or do other stakeholders perceive CSR in the same way? Wang and Berens’s study further compared the impact of different CSR on public stakeholders to that on financial stakeholders. In contrast, the public stakeholders think positively about the ethical CSR related to communities or the environment, as well as about the philanthropic CSR. But they hold a neutral view of the legal CSR. The different impacts of CSR to financial stakeholders and public stakeholders point to a potential conflict of interest between the two groups. For example, investors and environmental activists may value a firm’s commitment to conforming to social norms differently.

The conflicting interests between financial and public stakeholders may result in an obstacle for a firm to allocate limited resources to match the expectations of stakeholders. Sometimes firms may only be able to serve the interests of certain stakeholder groups while one group may benefit at the expense of another. Therefore, when managers communicate about their CSR aiming at fulfilling legal, ethical, or philanthropic expectations, they should choose to emphasize certain CSR in their communication, depending on the specific stakeholder group they are targeting. For example, to manage investor relations, emphasizing on environmental commitment may not be a sensible idea.

This article is based on the paper:

Wang, Yijing, and Guido Berens. "The Impact of Four Types of Corporate Social Performance on Reputation and Financial Performance." Journal of Business Ethics (2014): 1-23.

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