As thousands of companies were feeling the effects last fall of the spike in energy costs and scrambling to find more efficient ways to maintain their supply chains, light their stores and hedge fuel costs, FedEx Kinko’s was ahead of the curve.
The company established an environmental mission statement in the late 1990s after a growing number of its stores on college campuses reported a demand for more environmentally sustainable practices. Since then, FedEx Kinko’s has increased its use of recycled materials from 5 to 30 percent, and about 30 percent of its store locations use renewable energy. In terms of energy consumption, the company went from an SUV to a Toyota Prius.
So when energy prices soared last year, FedEx Kinko’s had a real advantage. While half the company’s supply chain structure was still affected, the environmental policies it developed almost a decade ago proved valuable not only to stakeholders, but also to the company’s bottom line.
Research from the McCombs School of Business at The University of Texas at Austin suggests corporate social responsibility practices like those of FedEx Kinko’s are becoming more critical to businesses than ever before.
As more companies shift to a “triple bottom line” focus—that is, paying attention not only to financial results but also to social and environmental outcomes—research shows that corporate social responsibility practices not only help improve society. They also tend to benefit the companies by adding value to their relationships with customers, employees, shareholders, their boards of directors and other firms.
Walking the Walk
Paula Ivey, a marketing and international business lecturer who teaches a corporate social responsibility class at the McCombs School, says watching the triple bottom line means making sure a company’s actions live up to the needs of all stakeholders, including the shareholders, community, environment, employees, customers and suppliers.
Everyone is familiar with companies that pursued a social responsibility agenda as a response to negative media attention and boycotts. What’s changed is that more companies are working to avoid earning a bad reputation in the first place. They’re finding more reasons to actively define their corporate values and responsibilities. And these initiatives are being delegated to newly created corporate social responsibility departments and outside firms.
In the last five years, about half the companies in the Fortune 500 have begun publishing corporate social responsibility annual reports. The reports discuss the companies’ sustainability and corporate social responsibility approaches, provide their mission statements and outline all the efforts undertaken to achieve their goals.
What’s more, a report from the Social Investment Forum—a national nonprofit membership association dedicated to promoting the concept and practice of socially and environmentally responsible investing—found that $2.3 trillion were invested in socially responsible investing mutual funds in 2005.
Ivey, who founded and operates a communications and consulting firm called the CSR Group, says one of the main reasons companies go into corporate social responsibility is reputation. And a company’s reputation is very important to customers.
“People are more loyal to companies who share their values and priorities,” Ivey says.
Caroline Bartel, assistant professor of management at the McCombs School, says an overlap in values is also important to employees. Her research has found that employees who identify with their company are more likely to stay at the firm. Even potential employees seek firms who are viewed positively by the outside world.
In her research, Bartel examined how four community outreach projects affected 250 Pillsbury Co. employee volunteers. What she discovered was the act of volunteering regularly led employees to make favorable comparisons between their own company and the practices and policies of other organizations. In other words, Pillsbury shined.
Allowing people to work outside their normal environment and experience “boundary-spanning roles”—such as volunteering for a nonprofit organization or being encouraged to participate in a corporate-sponsored community event—not only enhanced public perception. It was a powerful way for companies to help strengthen their status or image in the minds of their employees.
“People identify more strongly with socially desirable organizations,” Bartel says. “This is most likely driven by a basic need all individuals have for self-esteem.”
For example, if the company is doing a good deed or has a positive public image, some employees see that as a reflection on themselves.
Bartel adds that employees also noticed the positive attributes of their coworkers as they volunteered together. As it turns out, teaching second graders the concept of teamwork helped the employees build teamwork skills within the organization.
Professor Caroline Bartel
In addition to improving relationships with customers and employees, participating in corporate social responsibility efforts can also improve a company’s relationship with suppliers, directors and partners.
Management Professor Pamela Haunschild’s research found that ethical companies are more likely to attract high-quality network partners, whereas a firm that commits unethical acts will see a decline in the quality of its network.
“The network changes in the sense that directors of good- reputation, high-profitability firms will tend to leave the board,” says Haunschild. “The firm has to replace them with directors from poorer-reputation and lower-profitability firms.”
She adds that, on average, a firm that engages in an unethical act will see its board’s reputation ranking fall 10 points (out of 300) on Fortune magazine’s “Most Admired” scale.
“The networks of the firms that engage in these acts also tend to lose connections,” she says. “This can have important consequences, as firms get benefits from being well connected to other firms in their networks. Networks have been shown to affect important firm consequences, including innovation, learning, and even profitability and survival.”
Taking a Penalty for Progressiveness
Professor Pamela Haunschild
In another recent research study, however, Haunschild discovered that companies sometimes pay a price for good behavior. For example, just as a valedictorian who brings home a C would disappoint her parents more than her sibling who rarely makes good grades, a company with a good reputation may be penalized more than one with a poor reputation when it recalls a product.
“We find they are penalized in terms of market share,” Haunschild says. “While all firms experience somewhat reduced market share after a recall, better-reputation firms suffer greater reductions than poorer-reputation firms.”
Haunschild says these companies cannot rely on their positive reputations for protection. They must stay in touch with the customer and learn from the examples of other firms and their recall experiences.
“Since they get a bigger market penalty, they need to be even more vigilant about preventing recalls than relatively poor-reputation firms do,” says Haunschild. “In other work, we find that good-reputation firms do seem to be advantaged in other ways—for example, they do seem to learn more from a given recall and turn this into fewer future recalls.”
Moving Beyond the Expected
These days, corporate responsibility involves more than contributing community service hours and avoiding recalls.
“Usually companies are recycling and contributing the standard two percent of profits to philanthropic efforts. This is considered a starting point for corporate social responsibility,” Ivey says.
Professor Prabhudev Konana
Organizations now look at their corporate social responsibility plans from a holistic perspective—considering their effect on all stakeholders and ensuring the practices behind today’s profits don’t have a negative impact on the quality of life for tomorrow’s generations.
Companies are also beginning to work directly on hot issues, including HIV/AIDS workplace programs, supply chain responsibility and environmental threats like carbon dioxide and greenhouse gas emissions.
Prabhudev Konana, associate professor of information, risk and operations management, suggests companies can also act responsibly and support the global communities they affect by increasing their spending in rural towns and villages where they market their products.
“The goal should be to create wealth at the bottom of the pyramid, so they will spend money on the company’s products in the future,” he says. “Big companies can promote cooperative societies that are self-sustaining. They also reduce dependency on the government for social change.”
Konana recommends finding innovative ways to spread the wealth—for example, taking company getaways to rural communities or buying handmade goods from local artisans as corporate gifts.
Educating the youth of developing countries is another easy way to increase productivity, the size of the labor pool and disposable income in these areas.
“We need to move beyond giving money,” Konana says. “We need to help others become self-sustaining and economically well off. I think that’s much more strong and powerful. If they are economically self-dependent, they will start contributing to the economy.”
Establishing the Yardstick
Because one company cannot be responsible for saving the entire world, Ivey says it’s important for each business to establish individual goals and strategies to reach the outcome it hopes to achieve.
And while it’s hard to define exactly when and how companies are reaching acceptable corporate social responsibility standards, most companies use the Global Reporting Initiative as their guideline for reporting and measuring these practices.
“When you talk about companies having good social responsibility practices, it could mean a lot of different things,” Ivey says. “There’s no perfect company.”
In the long run, companies must think strategically about how they can best serve their stakeholders and bring the most value to both the community and the company. They’ll face tough decisions—like whether to help preserve their workforce with workplace HIV programs or fund initiatives to create energy-efficient trucks used in their supply chain. And while the benefits won’t necessarily be seen by the next quarterly earnings report, it’s clear that a company’s social responsibility practices are, indeed, an investment in its future.
To read an extended version of “The Triple Bottom Line,” visit Texas, the McCombs School of Business Magazine.