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The Benefits and Costs of CSR


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The benefits and costs of corporate social


Geoffrey B. Sprinkle


, Laureen A. Maines

Kelley School of Business, Indiana University, 1309 East 10thStreet, Bloomington, IN 47405-1701, U.S.A.

1. Perspectives on corporate social


Business leaders have expressed far-ranging and deeply-held opinions about corporate social respon-sibility (CSR). Nobel Prize-winning economistMilton Friedman (1970)succinctly expressed one viewpoint on CSR in his article The Social Responsibility of Business is to Increase Its Profits. John Mackey, the founder of Whole Foods, advanced a different view-point when he stated: ‘‘The business model that Whole Foods has embraced could represent a new form of capitalism, one that more consciously works for the common good instead of depending solely on the ‘invisible hand’ to generate positive results for society’’ (‘‘Rethinking,’’ 2005).

Regardless of business leaders’ fundamental be-liefs about CSR, they cannot ignore the implications of CSR for their businesses. Accordingly, our goal in this article is to provide some guidance for organiza-tions that wish to assess the benefits and costs of CSR. Knowledge of these benefits and costs can inform managers’ decisions on their companies’ positions on CSR and provide input on CSR endeavors. Because accounting plays a vital measurement role in orga-nizations, we focus on the interplay between ac-counting and corporate social responsibility.

We first provide an overarching definition of corporate social responsibility and categorize the various types of socially responsible endeavors in order to identify activities associated with CSR that create costs. Following this, we articulate firms’ likely motivations for engaging in CSR in order to identify potential benefits. We then discuss the role of accounting and corresponding linkages between accounting and CSR; here, we pay particular atten-tion to how firms might measure the costs and benefits of CSR decisions. Finally, we provide some concluding thoughts. Throughout the article, we offer numerous real-world examples to illustrate our ideas.

2. What is CSR?

The expansive literature on CSR contains numerous definitions of the construct. For example, the Euro-pean Commission (2010) defines corporate social responsibility as ‘‘a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.’’ A common definition in the management literature comes from

Davis (1973, p. 312), who defines CSR as ‘‘the firm’s considerations of, and response to, issues beyond the narrow economic, technical, and legal requirements of the firm to accomplish social [and environmental] benefits along with the traditional economic gains which the firm seeks.’’ Perhaps the most parsimoni-ous definition that encompasses the above ideas is


* Corresponding author.

E-mail addresses:sprinkle@indiana.edu(G.B. Sprinkle),

lmaines@indiana.edu(L.A. Maines).

0007-6813/$ — see front matter # 2010 Kelley School of Business, Indiana University. All rights reserved. doi:10.1016/j.bushor.2010.05.006


that CSR represents voluntary firm endeavors which benefit society.

In addition to numerous definitions of CSR, there are many terms for the same–—or similar–—construct. The most common term used in addition to corporate social responsibility is ‘‘corporate sustainability.’’ Corporate sustainability focuses on long-run share-holder value by incorporating principles in nine areas: ethics, governance, transparency, business relation-ships, financial return, community involvement, product value, employment practices, and environ-mental protection (Epstein, 2008). Thus, the activi-ties associated with corporate sustainability are very similar to those discussed in this article, although somewhat broader in scope.

CSR comprises a number of corporate activities that focus on the welfare of stakeholder groups other than investors, such as charitable and community organizations, employees, suppliers, customers, and future generations. One important category of CSR activities includes corporate contributions of cash or products to charitable and community orga-nizations. For example,Whirlpool Corporation (2010)

donates a refrigerator and range to every home built by Habitat for Humanity in North America.

Companies also allow employees to take time off from work to volunteer with charitable and commu-nity organizations. As an illustration,Eli Lilly (2010)

designates one day per year as a ‘‘Global Day of Service’’ whereby all employees worldwide under-take volunteer activities for the betterment of their local communities.

Many CSR activities relate to employee welfare and safety. Employee welfare encompasses initia-tives ranging from the provision of educational ben-efits to health support, such as on-site health clinics, fitness centers, and wellness classes on stress man-agement. Workplace safety also is a critical compo-nent of employee welfare, and many companies extend codes of conduct for employee welfare and safety to their suppliers. For example, McDonald’s (2009)has a code of conduct that provides require-ments for fair and safe working conditions for vendor employees and uses independent experts to audit vendors for adherence to the code of conduct.

Companies’ CSR activities also focus on meeting customer desires and protecting future generations. For example, Procter & Gamble’s 2008 sustainability report indicates that the company wants to ‘‘delight consumers with sustainable innovations that improve the environmental profile of our products’’ (Procter & Gamble, 2008, p. 4). These innovations appeal to customers’ environmental concerns through reduc-tions in packaging, and consumer water and energy use (Procter & Gamble, 2008, p. 40). Analogously, consumers’ concerns about the humane treatment of

animals leads companies to engage in animal welfare activities. For example,The Body Shop (2010)bans animal testing and considers effects on endangered species’ habitats when choosing ingredients for the company’s products.

Other activities include using ‘‘green’’ produc-tion practices, such as conserving energy, reducing emissions, using recycled materials, reducing pack-aging materials, and sourcing materials from ven-dors located geographically close to manufacturing facilities. For example, Sony (2010) manages the impact of its greenhouse gas emissions by setting targets for carbon dioxide emissions from produc-tion, shipping, and product use activities.

Companies often involve vendors and customers in their environmental efforts. Less than 5 years ago,

Wal-Mart (2006) announced a program to measure suppliers on their ability to reduce packaging, with a goal of eliminating 5% of total packaging between 2008 and 2013. Similarly, Hewlett-Packard (2010)

provides free recycling of toner cartridges for cus-tomers, whileStaples (2010)provides greater incen-tives for recycling by offering customers $3 in Staples Rewards for each toner cartridge returned.

3. Why do firms engage in CSR?

There are numerous reasons underlying organiza-tions’ motivations for engaging in socially responsible endeavors. First, firms may have altruistic intentions: they simply believe their CSR efforts are part and parcel of being a good global citizen. (Admittedly, it is difficult to disentangle such intentions from profit-seeking aspirations) For example, SC Johnson, Gap Inc., and Target prominently note on their websites that CSR and sustainability activities are simply ‘‘the right thing to do.’’ An oft-cited example involves

Merck (2010): ‘‘since 1987, the company has donated more than 2.5 billion tablets of the drug Mectizan1 (ivermectin)’’ to help eradicate river blindness in parts of Africa, Latin America, and the Middle East. Some observers have noted that this program conveys few, if any, financial benefits to Merck (Dizik, 2009). Likewise, after 9/11, Procter & Gamble, Honda, and Wal-Mart donated millions of dollars in cash and products to relief efforts, but made the conscious decision not to publicize their contributions (Alsop, 2002). Almost certainly, many organizations are mak-ing similar unpublicized philanthropic contributions in response to the disastrous earthquakes in Haiti and Chile.

Second, organizations may engage in CSR activities as ‘‘window dressing’’ to appease various stakeholder groups, such as nongovernmental organizations (NGOs). Viewed in this light, CSR may simply be


another cost of doing business: it is something firms feel they have to do in order to avoid negative publicity and other actions from NGOs. For example, it has been suggested that Best Buy’s electronics recycling program, which is free to consumers, was established in part because of pressures from the As You Sow Foundation (‘‘Best Buy,’’ 2008). In addition to incurring costs for CSR activities, it has been sug-gested that companies such as General Electric often are coerced by NGOs into incurring even more costs to report on their sustainability efforts (Murray, 2005); such reports might contain nothing but ‘‘hot air.’’ For example, British Petroleum received high marks for its reporting on safety issues during a period in which some individuals argued that its actual safety culture was poor, as evidenced by the explosion of a refinery in Texas that resulted in numerous employee deaths and injuries (Jackson, 2007; Vogel, 2007). In essence, observers have stated that ‘‘CSR is a con job. . .a neat trick used by NGOs as old-fashioned blackmail’’ (Albrechtsen, 2006, p. 12), and that ‘‘heightened corporate attention to CSR has not been entirely voluntary. . .the most common corporate response has been neither strategic nor operational but cos-metic’’ (Porter & Kramer, 2006, p. 80).

Third, there are potential contracting benefits: firms believe that CSR helps recruit, motivate, and retain employees. Numerous sources list these rea-sons as one of the most significant benefits of an active CSR program. For example, Deloitte Touche Tohmatsu provides its managers the opportunity to participate in year-long programs dedicated to im-proving the skills and abilities of young students; the company believes this endeavor will ‘‘help recruit top candidates. . .and increase retention rates of high-potential employees’’ (Dizik, 2009, p. B8). For many years, Timberland has provided employees the opportunity to take significant amounts of paid time off to volunteer for social causes of their choosing. The company notes that this program helps ‘‘attract and retain valuable talent’’ (Pereira, 2003). In-creased employee motivation also is a key driver, as observers have noted that ‘‘people are seeking meaning at work. . .and, it has become clear that staff motivation is a powerful bottom-line benefit of corporate responsibility’’ (Murray, 2007, p. 11). Increasingly, business students seem to be pushing their institutions for courses on social responsibility, suggesting that they are likely to seek full-time positions with socially responsible employers (Middleton, 2009). To this end, recruiters at Target have heard from job candidates that ‘‘commitment to the community is one of the top reasons they desire to work for the company’’ (Needleman, 2008).

Fourth, there are customer-related motivations: CSR may entice consumers to buy a company’s

products or services. As such, firms may reap price premiums or garner increases in market share. For example, one might view NBC’s recent decision to offer more television programming dedicated to health and social issues through a munificent lens. The decision, however, likely was far more strategic, as NBC was able to attract significant–—and increas-ingly scarce–—advertising dollars from companies wishing to link their products to shows’ socially re-deeming values (Vranica, 2009). We also see orga-nizations such as Crate & Barrel aligning themselves with non-profit charities like DonorsChoose, an orga-nization dedicated to improving our public school resources. Here, consumers decide where Crate & Barrel’s charitable contributions will be directed; for example, which specific classroom projects, sup-plies, and so forth, to fund. Involving the customer in this fashion is, naturally, expected to stimulate loyalty and sales (Steel, 2006). Companies that man-ufacture and sell luxury goods also are getting in on the game. Louis Vuitton, for instance, has been introducing eco-friendly products and supporting en-vironmental causes. In turn, this could entice cus-tomers to purchase the company’s luxury items (Dodes & Schechner, 2009). Such efforts also may help luxury goods companies reinvent their images; perhaps away from blatant consumerism, toward an understanding of how luxury products might even be better for the environment (e.g., they last longer). Fifth, companies’ focus on environmental con-cerns can lead to reductions in production costs. For example, Wal-Mart reduced transportation costs by $3.5 million through one initiative to reduce pack-aging on toys. From a CSR perspective, the company also saved ‘‘3,425 tons of corrugated materials, 1,358 barrels of oil, 5,190 trees and 727 shipping containers’’ (‘‘Wal-Mart,’’ 2006). Energy conserva-tion also is an area in which companies report significant operating costs savings.Ecology and En-vironment, Inc. (2008)reported an 80% reduction in annual carbon emissions from its headquarters build-ing, noting ‘‘the efficiency gains that resulted from these measures accrued an estimated net savings of approximately $232,000 from 1999 to 2008.’’

Finally, CSR can be viewed as an integral part of a company’s risk management efforts. To this end, CSR may be an effective lever for easing legal or regula-tory constraints. For example, companies may ‘‘voluntarily’’ reduce emissions in an effort to thwart legislation that could impose even tighter standards (Bradsher & Revkin, 2001). CSR also may reduce the likelihood of untoward incidents occurring, which–— in turn–—reduces the chances of lawsuits and damage to the firm’s reputation (‘‘A Stitch,’’ 2008). The costs of not managing such risks can be substantial; a popular example relates to Mattel’s experience with


Chinese suppliers who used lead paint in the manu-facture of toys. CSR may help manage such risks by ensuring that reputable and sustainable business practices are being followed throughout the supply chain. CSR may further manage risks associated with product obsolescence and the like; American Electric Power’s dedication to ‘‘clean’’ energy could, for example, be a Darwinian reaction to legislation that might otherwise jeopardize future profits. In the end, companies desperately wish to avoid disasters like the Exxon Valdez and Union Carbide Bhopal incidents. We close this section by noting that there likely are other reasons associated with an active CSR agenda. For example, just as customers may be more likely to purchase goods and services from socially responsible firms, suppliers may be keen on working with such organizations; there may be positive spillover effects for the supplier. It also is possible that firms engaging in CSR are more likely to attract capital from investors (e.g., start-ups) and receive more favorable terms from creditors. Many individuals likely wish to align their investment dollars with their moral aims.

4. The role of accounting

The heart of accounting is measurement. Account-ing aims to provide decision makers, both within and outside the firm, with relevant and reliable cost and benefit information to support decision making (see, e.g., Balakrishnan, Sivaramakrishnan, & Sprinkle, 2009). Externally, investors use accounting informa-tion to make stock acquisiinforma-tion and disposiinforma-tion deci-sions, and banks use accounting information to make lending decisions. Internally, accounting supports decisions that span the value chain, from the pur-chase of materials to product promotion and pricing to after-sales support. Decisions related to corpo-rate responsibility also can be viewed through the lens of benefits reaped by, and costs incurred by, the company.

There are two aspects of measurement: identi-fying costs and benefits, and estimating costs and benefits. As identification is the first step, our pri-mary goal is to delineate the specific costs and benefits associated with CSR. On the cost dimen-sion, we map costs to previously-discussed CSR activities and identify opportunity costs associated with activities that a company foregoes as a result of engaging in CSR activities. On the benefits dimen-sion, we map the aforementioned reasons firms engage in CSR to more specific, tangible benefits. Our list is by no means exhaustive. Many of the costs and benefits we identify likely are difficult to esti-mate. This concern notwithstanding, we suggest

several ways that organizations might accomplish the second step of estimation.

We hope that our discussion spurs corporate de-cision makers to make informed CSR dede-cisions. At the end of the day, decision making involves trading off what you get with what you give up. As such, effective CSR decisions rely on assessments of value and opportunity cost.

5. Measuring CSR costs

Costs–—as well as benefits–—arise from performing activities. Indeed, the concept behind activity-based costing, a popular managerial tool, is that products and services require activities which consume re-sources such as cash or employee time (Balakrishnan, Sivaramakrishnan, & Sprinkle, 2009). The costs asso-ciated with CSR can be measured by identifying the activities associated with CSR, discussed in Section2, as well as the activities the company was unable to undertake due to engaging in CSR activities (i.e., opportunity costs). The activities associated with CSR can lead to both increased outlays of cash and reductions in cash inflows.

The costs associated with cash contributions in-clude the raw cash flows less the reduction in taxes. Charitable contributions are deductible for tax pur-poses up to 10% of taxable income before certain adjustments. For most companies, it is unlikely that contributions will exceed this 10% threshold. So, assuming a corporate tax rate of 35%, if an organi-zation donates, say, $2 million dollars to Doctors Without Borders, then the net cost would be $1.3 million (= $2 million 0.35 $2 million).

For product contributions, the outflow would equal product cost (materials + labor + overhead) less–—again–—any tax benefits. In many instances, the tax deduction equals product cost plus 50% of the lost profit. So, for example, assume Whirlpool donates refrigerators costing $4 million to Habitat for Humanity and these refrigerators have a market value of $6 million. Assuming a 35% corporate tax rate, the net cost to Whirlpool would equal $2.25 million (= $4 million (($4 million + ($2 million lost profit .50))  .35)).

Firms also must consider the opportunity costs associated with cash and product donations. For example, if the $2 million contribution to Doctors Without Borders could be used for another project that generates a 12% return, then this cost (lost after-tax profit) needs to be considered. Likewise, Whirlpool’s donation of refrigerators has a similar opportunity cost, which would include a possible reduction in sales–—perhaps not in the mainstream market, assuming contributions do not significantly


restrict supply, but to Habitat homeowners who may otherwise have purchased a Whirlpool product.

For contributions of employees’ time, there really are not any tax benefits vis-a`-vis the wages paid to employees; wages are deductible for tax purposes regardless of whether employees volunteer their time. When employees volunteer their time, howev-er, there almost certainly is a cost associated with reductions in productivity. For example, in a recent year, KPMG employees volunteered 32,000 hours of their time to charitable endeavors (Murray, 2007). Assuming a hypothetical average billing rate of $150 per hour, this translates to $4.8 million in lost rev-enues. Of course, this calculation assumes there is a demand for the volunteered hours and not an excess capacity for labor. Perhaps KPMG employees volun-teer during the ‘‘off’’ season, when there is not enough business to keep all employees fully utilized. If this is the case, then the opportunity cost of labor-based contributions is close to zero and, as such, allowing employees to volunteer is cheaper than making cash and product donations. Measuring the cost of lost productivity is easier in organizations where the relationship between labor inputs and revenue is sharp (e.g., accounting firm, law firm, production-line worker). The cost is more difficult, but not less important, to measure when the input-output relation is not as clean (e.g., a corporate administrator).

It also is possible that organizations hire additional personnel to cover for the lost time and productivity; for every 2,000 hours volunteered, for example, one additional employee may need to be hired. Assuming a positive margin, this would be a less expensive solution to taking the revenue loss. Additional em-ployee costs include those related to having dedicat-ed employees focusdedicat-ed on CSR efforts; for example, the costs of employees identifying and coordinating CSR activities and putting press releases and lengthy reports together. The wages paid to these employees certainly should be considered. Finally, ‘‘labor’’ costs would include those related to the use of consulting firms; the recent focus on sustainability has been a boon for advisory-services firms (Davoudi, 2008).

Costs associated with CSR environmental activi-ties can be estimated by comparing the cost of ‘‘green’’ approaches to those of ‘‘traditional’’ ap-proaches. For example, the cost of making products using recycled raw materials can be compared to similar costs for using new raw materials. The in-cremental costs of using recycled products may extend throughout the production process; for ex-ample, greater scrap or greater labor costs may be associated with the use of recycled materials. We note, however, that–—as discussed in Section6–—the costs of environmentally-friendly approaches may

actually be lower than those of traditional ap-proaches, resulting in a benefit rather than cost.

Organizations must also consider whether their CSR programs have negative effects on customers and employees. For example, many department and grocery stores ask customers to make contributions to charity. Such ‘‘strong-armed’’ solicitations may make customers uneasy and engender negative goodwill, increasing the likelihood that consumers will take their business elsewhere (Felten, 2010). Whether consumers embrace or shun such programs is an empirical question. Organizations could survey their customers, including whether complaints have increased, or examine sales before and after imple-mentation to assess whether there are gains or losses connected with such programs. Finally, orga-nizations routinely prod employees to contribute to organizations such as the United Way. The effects on employee effort are uncertain, but–—again–—could be measured via surveys or productivity around solicitation efforts.

Finally, other costs should be considered, but may be rather difficult to estimate. For example, orga-nizations might assess the relation between the size of their contributions to CSR efforts and the benefits received; that is, ‘‘bang for the buck.’’ We posit that the relation between costs and benefits likely is concave, suggesting that returns diminish as the level of CSR increases. In like fashion, organizations should ensure their CSR efforts fit with their missions and product/service offerings. For example, Whirl-pool’s alignment with Habitat for Humanity seems ideal; other organizations should strive for similar mappings.

6. Measuring CSR benefits

Many of the benefits of corporate social responsibil-ity naturally mirror the reasons firms engage in CSR. We view these benefits in terms of increased cash inflows to the company or reduced cash outflows. Next, we list some of the more salient benefits that firms may wish to estimate.

First, above and beyond the tax deductions gar-nered by cash and product donations, local, state, and federal agencies frequently provide tax credits for CSR and sustainability efforts. For example, RBC Bearings recently received $8.3 million in federal tax credits associated with the production of wind turbines. In like fashion, companies can receive tax credits for using ‘‘green’’ materials and practices in the renovation and construction of buildings; for instance, by obtaining Leadership in Energy and Environmental Design (LEED) certification. Addi-tional tax incentives can come in the form of


sales-tax exemptions and property-tax abatements. Such credits and incentives are relatively straightfor-ward to measure in an ex ante fashion and entail an understanding of applicable laws and regulations.

Second, companies frequently reap ‘‘free’’ ad-vertising as a result of CSR. It is quite common for organizations’ good deeds to receive coverage on local and national radio and television, and be the subject of articles in newspapers, trade journals, and magazines. Almost certainly, organizations know what it costs to place an advertisement in these various media outlets. By tracking media hits and tallying the costs associated with ‘‘equivalent’’ ads, companies might reasonably estimate the ben-efits of such publicity.

Third–—and as discussed earlier–—CSR frequently is a means for attracting, motivating, and retaining talent. Of these, reductions in turnover (retention) may be the easiest to measure. Organizations can survey employees’ reasons for staying with, or leav-ing, the firm and map their responses to CSR-related questions into differential retention rates. In turn, firms can translate increased retention rates, if they exist, to the costs of employee turnover. Research suggests that the costs of employee turnover can be quite steep, ranging from 50% of base salary for entry-level positions to 400% of base salary for highly-skilled specialists (Blake, 2006). Thus, if CSR helps retain one highly skilled employee who earns $100,000, this translates to a $400,000 benefit.

In terms of motivating employees, recent re-search suggests that CSR may engender altruistic firm-contributions from employees and facilitate the use of implicit, or trust-based, contracts (Balakrishnan, Sprinkle, & Williamson, 2010). As such, CSR may increase employee motivation and reduce the need for costly performance evaluation and mea-surement systems. Estimating such benefits can be tricky and might entail examining employee produc-tivity surrounding CSR activities. For example, em-ployee performance may increase before and after they volunteer their time to a socially relevant en-deavor. Additionally, organizations may reap longer-term benefits from employee volunteerism programs in the form of increased abilities and knowledge, such as enhanced leadership skills, networking, and stra-tegic vision (Needleman, 2008). As an estimate, firms could measure the performance of employees who have participated in CSR programs to those who have not, controlling for prior performance.

Recruiting benefits may be the most difficult to estimate. They are, of course, inextricably linked to increased performance and profits via enhanced employee motivation and reductions in turnover. As such, firm measurement efforts on this dimension may best be centered on estimating the ‘‘raw’’

ability of new hires, as well as reductions in recruit-ing costs. Some possible–—albeit imperfect–—proxies for the skills and abilities of new hires could relate to the number of applicants (suggests a deeper talent pool), yield rates (employers are hiring the employees they most desire), GPA (for entry-level positions), number of degrees and quality of aca-demic institutions attended, and internal promotion percentages. Admittedly, such measures may be confounded with macroeconomic conditions and many are ‘‘soft’’ in the sense of being difficult to relate directly to firm performance; nonetheless, given individuals’ preferences in working for socially responsible organizations, they should be consid-ered in the CSR decision-making process. Firms also might reap reductions in the costs associated with hiring, including those related to advertising, HR personnel, travel for recruiters and job candidates, and requisite training. Any reductions in the average cost per hire, multiplied by the number of hires, provides an estimate of the benefits received. Of course, linking such reductions directly to CSR may be problematic and yield imprecise estimates.

Fourth, CSR efforts may lead to efficiencies and cost savings in the value chain. In addition to employ-ee motivational benefits (reduction in labor costs), there are other development, production, and after-sales benefits to consider. For example, more and more firms are using sustainable practices such as biomimicry, whereby design and manufacturing ef-forts are inspired by nature. Biomimicry can enable firms to increase product reliability and cut after-sales costs. A recent example relates to Volvo: by imitating properties of locusts’ vision, which allow the insects to avoid ‘‘collisions’’ in massive swarms mirroring traffic jams, Volvo contends it is able to develop a safer car (Patton, 2009). Other firms, such as IBM, have followed suit. Many companies believe that biomimicry and other ‘‘green’’ practices can lead to marked reductions in materials–—for example, reductions in chemicals in the manufacture of cloth-ing, as practiced by Finisterre, a company that makes some items based on the structure of an otter’s fur–— and production costs (Robbins, 2001). As materials costs generally are directly traceable to products, any savings should be readily measurable. Another example relates to Wal-Mart: the company has saved over $26 million per year in fuel costs, and markedly reduced carbon dioxide emissions, by using auxiliary power units to heat and cool truck cabs during man-datory rest stops (Diamond, 2009).

In addition to using fewer materials and reducing associated costs, ‘‘green’’ production may reduce both internal and–—as alluded to by the Volvo exam-ple–—external failure costs, thereby providing bene-fits via shrinking the costs of quality. For internal


failure costs, firms can measure relevant benefits by estimating reductions in expenses related to, for example, scrap, rework, and inspection. External failure costs can come in the form of customer com-plaints and returns, repairs and warranty work, and product recalls. External failure costs frequently are believed to be significantly higher than the ‘‘visible’’ costs. Accordingly, firms may wish to take the mea-sured costs and use, for instance, the Taguchi loss function to translate any reductions in after-sales costs to realized benefits. No firm wishes to suffer the massive recalls and external failure costs experi-enced by, for example, Toyota; the ultimate costs borne by Toyota will surely exceed the costs of fixing faulty gas pedals and brakes.

There are additional risk management benefits to consider. For example, by self-imposing lower waste, carbon-footprint, or other standards, firms may avoid litigation and/or tighter and costlier future regula-tions. As noted by Sharma, Teret, and Brownell (2010, p. 242), when ‘‘government intervention is perceived as a threat. . .self-regulatory actions are a means to prevent or forestall outside regulation.’’ For exam-ple, firms in the food industry have voluntarily pro-vided more informative labels, curtailed marketing efforts directed at promoting ‘‘unhealthy’’ foods to children, and pledged to sell fewer such products in our schools (Sharma et al., 2010). The authors further note that companies operating in the alcohol, chem-ical, tobacco, forestry, and fishing industries have similarly attempted to self-regulate, albeit with varying degrees of success. To estimate such benefits, firms would have to attach probabilities to possible regulatory or litigation outcomes and estimate future cash outflows associated with compliance (invest-ments in people, property, plant, and equipment) or settlements. Net-present value analysis would then be an appropriate tool to discount and aggregate any such savings.

Likewise, real-options analysis plays a role in evaluating how investments in socially responsible practices today may yield benefits in the form of future flexibility by allowing firms to be more nimble and cost efficient in responding to legal, competi-tive, or other contingencies. For example, Calpine Corporation is building a power plant in California that markedly reduces carbon dioxide emissions, well below those required by current standards. One rationale is that it provides Calpine flexibility in responding to possible future regulations (Schwartz, 2010). Moreover, Chevron believes that ‘‘building clean [oil] facilities now minimizes having to do expensive retrofitting (due to stricter environ-mental standards) later’’ (Diamond, 2009, p. C14). Fifth, firms might reasonably expect a positive relation between their CSR efforts and consumers’

purchasing behaviors. As discussed in the ‘‘costs’’ section, some CSR activities may have unintended consequences vis-a`-vis consumer spending. That said, most CSR efforts are likely to attract consumer dollars or, at worst, have a benign effect. Again, customer surveys would seem to be an important vehicle for assessing the overall impact of CSR on the very important customer constituent group, as well as teasing apart which programs are–—and which are not–—resonating with consumers. Such surveys could link CSR to consumers’ considerations and prefer-ences for a company’s brands and products (in-tended purchasing behaviors), levels of purchases, customer satisfaction, as well as loyalty and corpo-rate image metrics. Ultimately, such responses should map into sales and profit and, as such, dove-tail with firms’ efforts to measure the ‘‘customer perspective’’ of the balanced scorecard.

Companies such as Crate & Barrel are involving consumers in the process by allowing them to select, via programs such as DonorsChoose, where a com-pany’s charitable contributions will be directed; eBay, Bank of America, and Yahoo have employed similar programs. Via this practice, companies have a ready ‘‘control’’ group where they can use surveys to compare intended purchasing behaviors between consumers who receive DonorsChoose gift certifi-cates versus those who do not receive certificertifi-cates. In Crate & Barrel’s case, ‘‘82% of consumers who redeemed the certificates were ‘very likely to con-sider Crate & Barrel for their next home furnishings or accessories purchase’ compared to 76% of a control group of customers that didn’t get certificates’’ (Steel, 2006, p. B1). Crate & Barrel could map such responses into profit by taking the increased percent-age multiplied by the margin associated with an average purchase.

Finally, as mentioned in the ‘‘Why do firms engage in CSR?’’ section, there are other benefits that organizations may rightfully attempt to esti-mate. For example, do CSR endeavors increase firms’ access to capital and/or lead to more favor-able lending terms in the form of lower interest rates and the like? Does CSR increase barriers to entry and, perhaps, stave off competition (see

‘‘Survey,’’ 2005)? Moreover, to the extent firms’ CSR efforts are motivated by altruism, it is impor-tant to consider increases in social welfare. These benefits are exceedingly difficult to quantify: How do you measure the benefits of a family having a new home (Habitat for Humanity), a disabled per-son receiving a computer (Cristina Foundation), or a child getting necessary food, clothing, and medi-cine (UNICEF)? There clearly is an element of sub-jectivity in making such estimates; organizational participants need to have faith that their CSR


efforts are making a significant difference in the lives of others.

7. Concluding thoughts

Organizations increasingly are concerned about how their actions affect the environment and social wel-fare. Employees, consumers, investors, lenders, gov-ernmental agencies, and other stakeholder groups are demanding that firms operate in a socially re-sponsible manner. While internalizing societal goals is laudable, organizations cannot wantonly abandon their profit maximization aims. As with other organi-zational decisions, CSR decisions are not made in a vacuum but, rather, are made via an informed under-standing of the benefits reaped and the costs in-curred. To this end, organizations need to assess what they–—and others–—are getting and giving up from their CSR decisions.


We greatly appreciate the helpful comments and suggestions of Ramji Balakrishnan, Jason Brown, Jerrold Stern, and Michael Williamson.


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