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Wed 22 Aug 2012 12:42 PM

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Return on investment

Corporate social responsibility has been a widely used term for many decades in the business world, but how has it affected corporate behaviour?

Return on investment
Airbus was the first in the aerospace industry to receive the ISO 14001 environmental certification
Return on investment
Toyota’s highly successful Prius

The relationship between corporations and their CSR initiatives has seen a dramatic change in the past fifty years. While the fundamental principles of CSR can be found in one form or another from over one hundred years ago, the first academic papers on the subject didn’t occur till the 1940’s through works such as The Functions of the Executive by Chester Barnard and The Social Control of Business by JM Clark.

In essence, CSR’s definition has remained the same, summarised as the actions taken by a company to encourage a positive impact through its activities. The prevalent question remains, what effect does CSR have on the profitability of an organisation?

Inevitably, ‘doing the right thing’ costs more upfront, however supporters of CSR will argue that, in fact, companies with the greatest foresight and long-term vision will come out better than those looking to make a quick buck. Another way of seeing it is that putting effort into CSR distracts from the economic drive of a company and could therefore damage profit margins. There are then of course the cynics, who believe that CSR is the creation of smoke and mirrors, used by corporations to distract the greater public from their underlying agenda.

Whichever scenario you believe to be true, the increased flow of information has meant that it has become harder than ever for companies not to do the right thing, in particular when the global economy is in such dire straits.

What makes CSR interesting is that it is up to the company as to how much it commits itself and therefore CSR should be quantified and measured against profitability. While there is an international standard, recognised as ISO 26000, and a set of guide lines established by the United Nations, there is no formal legislation, and therefore CSR is purely a socioeconomic decision.

So how does a company decide how much or little attention to pay CSR and how can it increase profitability at the same time?

Starting with the environment, the reduction of a company’s carbon footprint is one of the most common focal points for many corporations who either wish to be seen, (or actually wish to), help the environment. Companies have introduced the strategy to use CSR as a method of selling their product or subtly taking market share away from another.

As an example, air travel is considered a necessity for many businesses. Looking at the supply chain, let us start with the aircraft manufacturers. Both Airbus and Boeing, have been heavily investing to ensure that their new aircraft are both quieter and more energy efficient, causing the airlines to think carefully whom to buy from. The airlines (in many cases), have been smart enough to hedge the responsibility back to the client by offering the option to pay extra money on your ticket to offset the carbon footprint of your journey. In the mean time companies such as Cisco are providing products that eliminate the need for you to take the plane in the first place, via products such as TelePresence, allowing real time conferencing in high definition.

One of the most interesting parts of CSR is the social impact of what your product and or service offers to a consumer and how much more likely are they to buy?

The launch of the Toyota Prius in 1997 indisputably assisted Toyota’s security in the auto industry and is anticipated to sell 9.78 million units in 2012. Coined by Washington Post columnist Robert Samuelson as ‘Prius Politics’, a study showed that more consumers bought a Prius as it made a statement about them, rather than for the efficient running costs and environmental impact. The company recently announced a profit of $3.7 billion for the months of April through June, making the Prius a great example of a company doing the right thing, while maintaining a substantial ROI.

An important question to ask then, is what impact occurs when a company decides to put CSR to one side? Does the popularity of a company or a product indicate how much the consumers and stake holder’s care? An interesting recent example might be that of Apple. With an annual revenue of $108 billion in 2011 and as the producer of the third most popular handset in the world, Apple’s success exploded into all areas of society in the late 90’s with highly popular products.

In spite of the company’s popularity, its products were boycotted by city officials in San Francisco, after it pulled out of its green certification scheme.

Melanie Nutter, a director for San Francisco’s Department of Environment, said: “We are disappointed that Apple chose to withdraw from EPEAT, and we hope that the city saying it will not buy Apple products will make Apple reconsider its participation,” according to the UK’s  Guardian newspaper.

Apple has also come under pressure from a Greenpeace report that highlights the carbon footprint of the company’s cloud computing centre as a point of concern.

The next question to ask would be how effective is boycotting?

An example can be found in Nike, whose very public track record with human rights violations in its sub-contractor sweat shops resulted in boycots in the 1990’s, causing a serious rethink of its policies. According to Rob Harrison, editor of Ethical Consumer: “Nike was targeted by campaigners because it was the world’s best-selling brand and because initially it denied responsibility for any malpractice that may be taking place in its sub-contractor factories.”

The company now has over 150 independent factory inspection reports on the Fair Labour Association website and has recently announced that they will be going ‘toxics-free’ by 2020. Not surprisingly Adidas and Puma have both subsequently offered the same commitment.

In terms of what number of consumers chose companies based on their CSR commitments, a recent survey conducted by YouGov for the Carbon Trust Standard found that one in seven consumers will boycott a product or service if their CSR isn’t in line with the expected standards.

According to INSEAD: “Failure to attend to corporate social responsibility (CSR) and ethics requirements from the various stakeholders has often seriously impaired careers of individuals and image of firms; whether it be through regulatory actions, market place sanctions, or consumer boycotts.

“It is in the own interest of business to give importance to CSR and ethics, and more fundamentally it is the right thing to do. Good ethics is good business, and companies that do the right thing often do better as a result.”

There is no doubt that the number of businesses who are engaged in CSR has increased over the past twenty years. According to Facilities Management Advisors: “Organizations are increasingly more involved in green initiatives by adopting sustainable processes and practices, adapting products and services to the low-carbon economy and innovating in all areas their business. The net positive on reducing waste, designing green buildings, implementing green operations and maintenance plans — all have continually proven to yield a positive return on investment (ROI).”

It also points out that the development of the new carbon trading markets and renewable energy credits, has made it easier for organizations to create and measure direct ROI from CSR.

It seems that CSR has a positive effect on ROI but as the old business proverb goes, “If you don’t measure it, it doesn’t exist.” A report titled ‘CSR Counts,’ made it clear that quantification is vital: “CSR managers are almost uniformly challenged by CSR skeptics ... But even if an executive rejects CSR on ideological grounds, it is still unacceptable in a modern company. Questioning it for lack of quantifiable proof, however, is entirely rational.”

According to a report conducted by KPMG, 40% of all corporations surveyed will maintain their level of brand management during the global economic crisis and a further 15% will increase investment, reaffirming that CSR is an important part of maintaining profitability.

In the words of William Ford Junior,  chairman of Ford: “A good company delivers excellent products and services, and a great company does all that and strives to make the world a better place.”

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