June 1st, 2009
Corporate social responsibility’s (CSR) rapid growth over the last few years has been driven by the numerous benefits organizations are realizing from it.
But many continue to ask “what are these benefits, how do you measure them, and how do you maximize them?” These have remained the burning questions for CSR since the beginning, even as CSR has skyrocketed to the top quartile of many global corporations’ agendas.
CSR’s Benefits
There is a growing acceptance that CSR can now help deliver improved financial performance, as well as improved stakeholder performance, risk management, investor relations and access to new markets.
Both statistical and case studies have shown that CSR can generate top-line revenues for a company. It can inspire innovation, support new product development, open new markets, acquire customers, and enhance reputation and brand perceptions. At the other end, it can reduce costs by improving employee recruitment, productivity and retention; reducing commercial risks; and cutting energy use or waste.
Just as with an annual financial report, or a business or marketing plan, one of the primary benefits of a CSR report, specifically, is that it allows an organization to see where it is and where it needs to go on matters not immediately and directly related to finance, at the same time as informing its audience of its performance on such matters.
A report published by NGO Business in the Community (BITC) last October revealed that FTSE companies that actively managed and measured corporate responsibility issues outperformed the FTSE 350 on total shareholder return by between 3.3 and 7.7 per cent throughout the period 2002-2007. Similarly, the Dow Jones Sustainability Index 2008 report affirmed a positive, strategically significant correlation between corporate sustainability and financial performance.
In February, A.T. Kearney reported that, “in 16 of the 18 industries studied, companies committed to sustainability outperformed industry averages by 15 percent over the six months from May through November 2008.” The value created by CSR is clearly holding strong above other business practices in this economy.
Moreover, it is increasingly understood that financial statements capture only a fraction of corporate risks and value-creation potential, with the large majority deriving from less tangible factors such as human capital and resource efficiency. Environmental, social and governance data is relevant, material information that investors should have – and increasingly want –as a means to better gauge longer-term performance.
Measuring CSR
For years, we assumed that measuring CSR’s return in general was something we should attempt to do in traditional ways. We learned the hard way, first from Enron and WorldCom, and more recently from the financial sector as a whole, that there is no such thing as an exact science when it comes to measuring the return on important CSR strategies like transparency.
Among the difficulties with measuring CSR’s ROI is that there are many different forms of such ROI that can be found in each company, and it can also differ greatly among companies depending on industry, geography, type of program(s) involved, and many other variables. This makes best practices nearly impossible to identify and each company is left to “reinvent the wheel” of CSR measurement out of necessity for its own activities and purposes.
Moreover, the more CSR becomes an integral part of daily business, the more difficult it is to differentiate costs as well as benefits that relate only to the CSR aspects of a company’s actions.
Yet, some individual components of broader CSR efforts are more measurable than others. Sustainability processes that focus on minimizing waste and resource use, for example, relate directly to the bottom line and are relatively easy to quantify. There are also several benefits of implementing a diversity policy in the workplace, such as reduced turnover of employees, that are more easily quantifiable in terms of opportunity costs for training and developing people.
For those CSR efforts that are less measurable, or even impossible to measure, it’s important to remember that many things of value that businesses do or have done routinely also are equally difficult to measure. These include traditional forms of advertising, training and development, and branding. The relationship to these business strategies and business success is correlative, just as it is with CSR.
There is an understanding by many that CSR is about creating longer-term value than quarterly earnings estimates. Ultimately, the most effective measure of CSR may be a company’s share price or valuation over a longer period, with the only question then remaining of how long the time horizon should be.
Maximizing CSR
Companies that don’t try to measure their CSR outcomes may still be enjoying positive social and/or business ROI – but are probably not maximizing those benefits, simply because they will not know which CSR activities are performing well and which aren’t. Without that knowledge, there’s no way to promote continuous improvement.
Instead of giving up on measurement altogether, or “focusing on the no-win question of finding the exact ROI of CSR,” UC Berkeley’s Kellie McElhaney recommends that businesses “measure fewer things better.” “Focus on measuring a few specific things that are relevant to your CSR strategy, such as brand reputation, energy efficiency and dollars saved, employee loyalty, and positive changes in leadership skills among employees. Then add a few more metrics.”
“I have seen countless companies that have used a story around one or two solid metrics from a CSR strategy to elevate its reputation, and I have seen countless other companies whose CSR programs have been cut because the team was so bogged down executing a complicated metrics plan,” McElhaney wrote in a recent BSR newsletter article.
Think about and try to measure what your CSR strategy did to support your overall corporate strategy. Then communicate CSR’s value using both facts and real examples of impact, since people often remember stories more easily than bare facts.
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