Social responsibility can benefit the bottom line

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Corporate social responsibility has become a buzzword in Australian business. It’s easy to see how communities stand to benefit when firms participate in a clean water campaign or have a large philanthropic presence.

However, such initiatives may also benefit the companies involved.

Research by the Kellogg School of Management at Northwestern University suggests that implementing a corporate social responsibility (CSR) programme can actually benefit a firm’s bottom line.

The researchers explain that when investors see a firm withhold or devote resources to CSR initiatives, they infer that its executives are acting on private information about the future earnings and cash flows of the firm. They suggest that when a company devotes resources to a CSR program, it sends a signal to investors about the overall health and financial performance of the company. Specifically, they found that companies whose CSR spending exceeds investor expectations experience positive stock returns.

While most research in this area has been focused on the impact on a company’s stock price, the Kellogg researchers also looked at operating results. They reviewed performance of measures such as revenues, margins and profits, and found that companies that engaged in CSR activities saw an improvement in the two years following announcement of the CSR initiatives.

CSR projects can also have a positive impact on the way consumers view a company’s products. Research by Kellogg School Marketing professor Alexander Chernev found that knowing that a company has behaved ethically can cause customers to perceive that company’s products as performing better. This effect is described as a “benevolent halo”. Professor Chernev noted that it is not just that people view the company in a more positive light, but, rather, that they actually experience its products differently.

Social responsibility is becoming more important for businesses today. It is seen as a way to attract and retain employees. This research shows that it can also help the bottom line and boost consumer views of a company’s products.

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