Making sense of CSR and business performance

Whether a firm is considering its corporate social responsibility (CSR) from an economic point of view, or from altruistic motives, managers need to understand the implications of CSR activities on economic performance.

by Leena Lankoski

Previous literature has produced apparently mixed, inconclusive and controversial results, due to a lack of a solid theoretical framework. This working paper by Leena Lankoski, visiting professor at the INSEAD Business in Society Research Centre, develops a theoretical framework based specifically on CSR activities and their outputs.

Lankoski concentrates on corporate responsibility for environmental issues - the impact on living and non-living natural systems - and social issues - the impact on human beings and societies. Economic performance in relation to CSR activities is harder to define. The incremental economic impact includes both direct money outlays and inflows and other implications whose monetary value is difficult to establish, such as a firm's image with customers, or workers' health and motivation.

Lankoski divides the outputs of CSR activities into learning, reputation and CSR outcomes. CSR-related learning results in increased expertise, resources and capabilities for the firm. Reputation is the false or valid image of the firm held by stakeholders.

CSR outcomes are the social or environmental impacts made by the firm. Effective CSR activities produce CSR outcomes that are observable (i.e. directly experienced or known by stakeholders' interactions with the firm) or unobservable (only known if somehow communicated to stakeholders). Lankoski identifies eight different classes of CSR activities according to whether they produce one or more of the three outputs.

Previously identified links between CSR and economic performance include those that seem to increase production costs, and those that appear to result in efficiency savings in production. Stakeholder theory links CSR activities with, among other things, improved firm image, savings in regulatory costs or improved staff health.

This integrated thesis structures these individual links through the distinction between the different types of outputs and their different causal relationships to economic performance. After initial costs, learning may reduce costs through increased capabilities, and reputation and CSR outcomes may result in different forms of stakeholder actions with cost and revenue impacts.

Finally, Lankoski looks at how CSR activities and economic performance are related. Her findings show that the relationship between CSR outputs and economic performance follows an inverted U-shaped form. This shape is always case-specific, according to the particular firm-specific and issue-specific characteristics at a particular time. The inverted U form is therefore dynamic, as external factors can change over time.

In addition, CSR activities that do not produce CSR outcomes but do produce learning or reputation can affect the efficiency of the firm and therefore its relationship to the U-form, which supposes maximum efficiency. For best CSR results, effective activities are needed, while for the best economic results, both effective and efficient activities are required.

This theoretical framework clarifies the apparently conflicting empirical evidence by showing that a firm's position with regard to the inverted U curve at a particular time will indicate either a positive or negative impact. The paper suggests further research into economic responsibilities; how particular outputs contribute to economic performance; the efficiency of CSR management; the development of decision-support tools; and the role of business in society.
Corporate responsibility activities and economic performance: why and how they are connected
Leena Lankoski

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