The United Nations Sustainable Development Goals (SDGs) have made it fashionable to jump on the corporate social responsibility (CSR) bandwagon. For many firms, it’s a marketing line item more so than a fundamental transformation that ripples across their governance, product development, manufacturing, supply chain, operations and financial measurements.
For executives and board members on the fence, there is now empirical evidence that CSR is more than lipstick on a pig; it has the potential to increase the economic value of innovation and shareholder value.
Corporate Social Responsibility
CSR is a private business self-regulating framework that helps an organization be socially accountable to its customers, employees, shareholders and the public, especially in the areas of economic, legal, ethical and philanthropic duties and responsibilities. The definition has extended to include the environment in terms of waste and pollution reduction in their supply chain and social, educational and giving programs such as community volunteering, socially-responsible business practices, cause promotions and activism, cause-related marketing, corporate social marketing and corporate philanthropy.
But for some shareholders, CSR has been viewed as a socio-political, left-wing, bleeding-heart movement that sacrifices profits and return on capital.
According to a recent study, CSR is more than a capitalist having a heart; it creates significant value, increases innovation and benefits the bottom line. It’s good for business.
Empirical research explaining CSR’s impact on innovation has been limited thus far. The study set out to examine the relationship between CSR, corporate financial performance and the importance of CSR in shaping a firm’s strategy.
Specifically, the researchers analyzed the effects of high CSR performance on:
- The role of innovation in expanding investment and growth opportunities
- Innovation efficiency
- Reducing financing constraints to support growth initiatives using a data set comprised of firm characteristic data (such as firm size, firm age, profitability, capital expenditures and investment opportunities), patent data, and stock market reaction to patent grants and analyzed across CSR dimensions of corporate governance, product quality and safety, employee, diversity, community and environment.
Increases Economic Value And Quantity Of Innovation
According to the research findings, CSR performance is statistically significant in economic value and quantity of innovation. One result suggests that a one standard deviation increase in the CSR score leads to an increase in the economic value of innovation by about 10% of its sample mean. CSR attributes that are most visible to consumers and the public, such as diversity, employee relations, community and environment, have the greatest impact, whereas corporate governance and product quality and safety were not statistically significant in affecting the quantity of innovation.
Lowers Financing Costs
Innovation also lowers financing costs. In 2013, 38% of U.S. patents were pledged as collateral to raise debt financing, which contributed to the financing of innovation or approximately 20% of R&D expenses. Quantity and value of patents contribute to less severe financing constraints as companies are able to raise more debt and allocate more to R&D. This is reinforced based on statistical models that show high CSR performance increases innovation by reducing financing constraints, especially when combined with valuable patents. CSR relaxes debt financing from banks more easily because of the lower firm-specific risk and obtaining external financing at lower capital costs.
Competitive Differentiation
CSR is a distinctive market differentiator. Consumers are attracted to companies that are committed to corporate social responsibility. Keeping all things constant, customers are more likely to choose a company with higher CSR performance that aligns with their core values and preferences. CSR enhances the reputation and credibility of a firm and deepens customer loyalty and trust. High-performing CSR companies attract more loyal customers who are less price-elastic, and therefore the firm is able to charge a premium, which, in turn, increases profit margins and drives more opportunities to expand growth options and invest in product innovation. The empirical results do, in fact, show that high CSR performance increases the positive effect on the quantity and economic value of innovation and growth investment opportunities.
Higher Productivity, Higher Innovation Efficiency
Employees are positively influenced by high CSR performance. They perceive their leaders as more trustworthy. This trust leads to value and goal alignment. Less organizational push back lowers the cost of labor as workforce productivity is higher and projects have a higher success rate. This, in turn, promotes high-quality innovation that is produced more efficiently. The research findings are consistent with the view that high CSR performance does, in fact, improve the economic value of innovation by increasing innovation output and innovation efficiency.
CSR activities aren’t simply cosmetic. They have the potential to increase long-term company valuation and shareholder value. Based on empirical evidence, high CSR performance increases customer loyalty, boosts employee productivity and lowers financing costs, all of which contribute to the economic value of innovation and shareholder wealth. High CSR performance has a positive statistical effect on innovation and shows a positive correlation between CSR and company value. Caring for the interests of customers, employees and partners encourages their willingness to support a company.
Article Credit: forbes.