Corporate Social Responsibility And Its Effects On Organizational Performance

Organizations continuously look for ways to grow the company and tackle new challenges as they arise. In doing so, these corporations are attempting to manage multiple aspects simultaneously, such as employee motivation, productivity, increasing profits, corporate ethics, and leadership, just to name a few. Each action taken (or not taken), policy and procedure implemented, and company goal should be examined for how it affects various stakeholders. Executives, managers, shareholders, employees, and customers immediately come to mind as those who will be impacted by organizational decisions and maneuvers, but often left out of the mix of stakeholders is the local community and society at large.


Industrial-organizational psychology focuses heavily on motivational theories, leadership theories, empowerment-boosting practices, training initiatives, and modeling practices, but most of these ignore the role that local environments play in business practices. Corporate social responsibility (CSR) provides an ethical look at the ways organizations can interact with communities for mutual benefits. Although there is no consensus on a definition for CSR, Mackey, Mackey, and Barney (2007) defined it as the voluntary actions an organization takes to improve upon societal conditions. This suggests that a CSR initiative is one that considers the intangible stakeholders present in the community.


Stakeholder Theory


Before delving into CSR practices, research, and results, it might help to start with a foundation of why CSR activities can be beneficial and how they influence stakeholders. But first, who or what are stakeholders? Founding stakeholder theorist, R. E. Freeman (1984), defined stakeholders as individuals, groups, or organizations that affect, or are affected by an organization’s actions. Some examples of stakeholders are employees, company leadership, shareholders, suppliers, customers, and the communities involved in social relationships with the organization, just to name a few. Or, as Rowley (1977) pointed out, an organization exists within a network of its stakeholders. Because these relationships affect others, stakeholder theory advocates that a firm takes stakeholders’ needs into account when making business decisions (Hayibor, 2015).


Stakeholder theory revolves around the principles of fairness and justice, and attempts to balance the needs of various stakeholders, or groups of stakeholders, without harming company performance (Hayibor, 2015). For instance, if a company sees increased sales and larger profits, should they use the additional funds to increase shareholder wealth, provide raises or other benefits to employees, decrease prices for customers, improve the community where the business operates, or fulfill some other stakeholder need? Furthermore, a company’s treatment of different stakeholders influences company performance (Berman, Wicks, Kotha, & Jones, 1999). This suggests that the balancing act that a firm’s leadership takes to satisfy the needs of different stakeholders could have profound implications.


Because stakeholder theory is based on principles of fairness, justice, and reciprocity (Hayibor, 2015), it incorporates many other psychological theories explaining why various stakeholders react in certain ways, and provides a framework for detecting likely outcomes related to a firm’s actions. For example, Adams’ (1965) equity theory states that when an individual perceives some aspect to be unfair, that person will take action to restore equity. This can be accomplished by reducing inputs, decreasing expectations, changing the referent of comparison, and other ways. Another theory applying to stakeholder theory is Homans’ (1958) social exchange theory, which revolves around the reciprocity between the firm and stakeholders (Hayibor, 2015). If a firm is perceived to violate principles of fairness, stakeholders will retaliate in ways that punish the firm. Conversely, if a firm is seen as having integrity and upholding fairness, justice, and equitable actions, stakeholders are likely to reciprocate by cooperating with, rewarding, or otherwise helping the firm (Hayibor, 2015).


Social learning theory (Bandura, 1977) suggests that organizations take on the characteristics, morals, and perceptions of company executives (Jones, 1995), as leadership’s culture affects the behaviors of others in the organization. In other words, if a CEO is seen as a trustworthy and socially responsible person, the company will likely be seen in this light as well. Where reciprocity is concerned, this is important because the “face” of the company influences perception, and perception influences the behavior to reward or punish the company for its corporate actions. This is where trust becomes a vital tool and can be helpful in predicting stakeholder perceptions of the firm’s actions. Cooperative behavior, loyalty, and increased effort are likely results stemming from a firm’s fair treatment and practices, due to their increased stakeholder trust (Hayibor, 2015). Additionally, organizational trust is affected by a firm’s past behaviors and perception of their actions. This means that companies with poor past behaviors, that take seemingly positive actions, might not see positive results if those actions are perceived as not being entirely altruistic. In other words, when stakeholder trust is absent, the firm’s actions may come across as opportunistic, and they won’t realize the same results as if they had gained stakeholder trust (Rowley & Berman, 2000).


So, what are some real-world consequences that can result from a company’s behavior, according to stakeholder theory? When customers lack trust in an organization, they may boycott, divest, or even sabotage that company as punishment for their actions (Hayibor, 2015). Conversely, customers who perceive an organization to be overly generous or performing great social benefits may feel a sense of obligation to purchase the products and services of the firm. Other stakeholder actions include strikes, increased regulation, increased donations, word-of-mouth advertising, and heightened loyalty (Hayibor, 2015). Therefore, all actions taken by stakeholders rely on two factors: 1) the perception of equity in a firm’s actions and behaviors, and 2) how those perceptions are reciprocated by the affected stakeholders (Hayibor, 2015).


To summarize the principles of stakeholder theory, stakeholders are more likely to cooperate with an organization to help achieve its goals if they perceive the actions and behaviors of the organization to be fair and equitable, but will take negative actions against the organization if they believe they or others have been mistreated, or if the organization acted in manipulative or opportunistic ways (Hayibor, 2015). Accordingly, firms perceived to treat stakeholders fairly and ethically, are expected to out-perform their counterparts (Berman et al., 1999). Now that there is a psychological basis behind CSR, perhaps the research findings discussed will be more meaningful or at least there is a better understanding of why CSR programs work in some instances and not in others.


CSR Research


Corporate social responsibility (CSR) involves the relationship and interactions a business has with society and the local environment (Baumann-Pauly, Wickert, Spence, & Scherer, 2013). Accordingly, CSR is seen as an organizational responsibility that firms owe to society because of the impacts their actions have on stakeholders and the environment (Young-Ju, Suk-Chul, & Jae-Woong, 2017). In fact, CSR programs are considered so vital to business operations, that 76% of corporate executives believe CSR activities positively influence shareholder value, and 55% of the executives feel that CSR practices contribute to a strong reputation (McKinsey & Company, 2010). This attitude is so prevalent that many executives feel their corporations must adopt CSR programs or face consequences from stakeholders (Skilton & Purdy, 2016). A few examples of CSR programs include donating to charities, volunteering, energy savings, community clean-up, and infrastructure maintenance (Mullen, 1997; Skilton & Purdy, 2016). However, many of the benefits from these programs rely on the perception of altruism and authenticity.


Benefits


Although there are numerous contributing variables, Stout (2012) argued that corporate profits can indeed be increased through CSR initiatives. However, this may be the culminating effect of other benefits. For instance, employee commitment and trust are increased through authentic CSR programs (Skilton & Purdy, 2016). Customer attitudes, buying behaviors, brand loyalty, brand advocacy, employee productivity, and overall public awareness have also been found to be increased through various CSR activities (Smith, 1994; Young-Ju, Suk-Chul, & Jae-Woong, 2017). It seems as long as the CSR program is perceived as altruistic, the company is likely to experience the benefits that come from better social practices.


Yet, there are secondary corporate benefits that often accompany CSR initiatives. For instance, as employee productivity increases, production costs decrease (Smith, 1994). Or, as brand awareness and advocacy are bolstered, this acts as free marketing and advertising, which not only boosts sales, but also reduces advertising costs (Mullen, 1997). Additionally, tax benefits have been created to generate investment into social programs through the Tax Reform Act of 1986 (Dennis & Holcomb, 1996). These secondary perks, coupled with heightened consumer sentiment, demonstrate multiple ways in which corporate profits can see increases. One study performed by UCLA found that businesses with higher philanthropic scores on a charitable-giving matrix had higher rates of return, demonstrating that charitable giving can positively influence corporate performance (Mullen, 1997).


Another study on charitable giving found that 45% of respondents claimed they would switch brands to support socially responsible companies (DeNitto, 1989). When employees were involved in philanthropic projects, 53% claimed an increase in company loyalty (Smith, 1994). Piling on the evidence, a study analyzing 188 organizations found employee morale to be three times higher in organizations with a large presence and involvement in the community (Mullen, 1997). As employee morale increases, so too does motivation and productivity (Taylor, 2015). And, as already discussed, increased productivity can boost profits and decrease costs.


Prevention and Mitigation


In their study investigating the influence of CSR programs on the perception of luxury brands, Young-Ju et al. (2017) did not find a significant correlation between CSR and perception, but did find a negative one in the absence of a CSR program. Therefore, their research suggests that although brand perception is not always increased through CSR, it can be harmed by not participating in some type of CSR activity. Additionally, because CSR often increases consumer trust and loyalty, it can result in less severe public perception when facing a crisis (Klein & Dawar, 2004). Also, not only would many consumers switch brands to favor socially responsible business, as discussed above, but 75% of consumers claimed that no matter how large the discount, they would not purchase the products or services from a company perceived to be not socially responsible (Paluszek, 1996).


These studies and results demonstrate that even when CSR programs do not have an immediate effect, they can manifest their benefits in other ways, including reducing the harmful effects of other events. In other words, this evidence suggests that even when CSR initiatives have no effect on increasing customers, sales, or profits, they can prevent customer loss. They can also be used to repair past negative corporate behaviors, if the CSR program is perceived to be altruistic (Schrempf-Stirling, Palazzo, & Phillips, 2015). In this way, they are useful tools in repairing past image problems and corporate malfeasance.


Harmful Consequences


Can CSR programs backfire and lead to negative consequences? Inauthenticity can ruin the social relationship attempting to be elevated or repaired. For instance, greenwashing is an attempt to cover up poor or negative practices by engaging in environmentally-friendly CSR activities (Skilton & Purdy, 2016). Because greenwashing is seen as an inauthentic practice, it can result in no improvements or even further harm the reputation and performance of the company in question.


Perception is everything when it comes to CSR. As Mullen (1997) pointed out, when public perception of a company holds that profits are the only measure of success, support for that company dwindles. In support of this notion, Skilton & Purdy (2016) offered an example of how perception can swing widely around the same event, namely, the Ronald McDonald House charity that helps the families of sick children. If one’s perception is that McDonald’s is using their influence to altruistically help those in need, then that person is more likely to support McDonald’s Corporation and their products. However, if the charity is viewed as being inauthentic and used to exploit sick children, then the individual will harbor negative feelings towards McDonald’s.


Sometimes good intentions do not affect everyone in the same ways and lead to negative perceptions of those actions. For instance, many high-tech firms have implemented private buses for employees to reduce environmental impact and provide a beneficial service (Skilton & Purdy, 2016). However, the resulting consequences drove up housing prices and increased economic segregation. Public perception led to feelings of corporate greed, elitism, and political maneuvering, and resulted in negative evaluations about the firms and their practices. Although these practices started as good intentions, they ultimately harmed local reputations of many firms.


Conclusion


There are numerous aspects to creating, implementing, and monitoring a CSR intervention. Additionally, organizations must decide which methods might provide the greatest benefits to their business practices and why they are enacting the CSR initiatives. Repairing a tarnished image may require vastly different approaches than simply increasing profits. Furthermore, some companies see different results based on how altruistic their methods are perceived by the public as well as employees. However, when executed correctly, CSR initiatives have clear benefits to business practices.

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