Academics are as interested as companies in understanding the business case for sustainability. Actually, they often dig even deeper as evident in a new paper entitled “Do Actions Speak Louder Than Words? The case of CSR.” Written by Olga Hawn and Prof. Ioannis Ioannou, this paper explores not if CSR affects financial performance, but rather under what conditions.
While the literature concludes that ESG (environmental/social/governance) actions have a statistically significant positive effect on financial performance, past research has not fully examined the mechanisms that could moderate this relationship. Ioannou and Hawn focus on a very interesting aspect of this relationship – the differential impact of symbolic and substantive CSR actions on the market value of firms, and its dependency on the level of the firm’s prior CSR-based intangible assets. The results are quite surprising and even a bit troubling.
First, let’s clarify the difference between symbolic and substantive CSR actions. According to the authors, symbolic actions “usually represent ceremonial conformity or compliance.” It can be an announcement on establishing an ethics committee all the way to “window dressing” or greenwashing efforts that are designed to give the appearance of action, while allowing the companies to continue with business as usual.
Substantive CSR actions, on the other hand, “represent realized role performance: the organization undertakes real actions to meet the expectations of those societal actors upon which it depends for critical resources.” These actions often require significant changes in core practices, or even long-time commitments and investments. Unilever’s Sustainable Living Plan and M&S’s Plan A would be two outstanding examples of such actions.
The authors were interested not just in the different impact of these two types of activities on the value of a firm, but also in the way this impact is influenced by prior CSR-based assets, which basically represent the cumulative results of undertaking CSR actions in the past (for example, Timberland has quite a few CSR assets, while ExxonMobil not so much). Why exactly? Well, first the authors believe this is a variable that makes a difference and second, it has not been well researched.
Using a sample that included 10,400 observations based on 2,261 unique firms across 7 years (2002 to 2008), the authors investigated four hypotheses. The first two were:
1. The higher the CSR assets, the higher the effect that symbolic ESG actions will have on firm performance, and vice versa.
2. The higher the CSR assets, the lower the effect that substantive ESG actions will have on firm performance, compared to symbolic actions, and vice versa.
The authors explain that the logic behind these somewhat parallel hypotheses is that for firms with higher CSR assets, substantive ESG actions will be relatively less beneficial compared to symbolic ESG actions “a) because external constituents face higher monitoring and verification costs, and b) because external constituents will be more likely to expect and to rely on symbolic ESG actions for their value assessments.”
These hypotheses might raise an eyebrow or two – after all, why would investors value symbolic CSR over substantive CSR in the case of a company with a CSR reputation, when the former providers lesser value to the company than the latter? Yet, the authors found that “symbolic actions have a higher impact on market value in the presence of higher intangible assets.”
The other two hypotheses related to the question of what happens whenever a firm engages in both types of activities:
3. The larger the gap between symbolic and substantive ESG actions, the higher its effect on firm performance, and vice versa.
4. The higher the coupling between substantive and symbolic ESG actions (i.e. their interaction), the higher its effect on firm performance, and vice versa.
The authors found that a larger gap between symbolic and substantive actions has a higher positive effect on firm performance. In addition, the more firms engage in both types of actions, the higher the value accumulating to the firm.
The bottom line of this research, especially with regards to the first two hypotheses is bit troubling. It sends a message to CSR executives that in order to achieve higher market value they need to get engaged in symbolic CSR actions when the intangible assets of their firms are high, at least in the short term. In other words, the message to all the Unilevers, Timberlands, Pumas and other CSR leaders that in the short run making a greater CSR effort can actually hurt them in terms of value, and that symbolic actions might be preferable.
My only concern with this conclusion is that without a long-term view it might provide a somewhat misleading guidance. Similarly, you won’t be surprised to find that companies may not benefit in the short-term for taking CSR actions compared to ‘business as usual’ – does it mean that companies would be better off not taking these steps at all? Probably not if the benefits in the long-term outweigh the costs the in the short-term. So should CSR executives make decisions based only on short-term observations? I doubt that. What do you think?
Raz Godelnik is the co-founder of Eco-Libris, a green company working to green up the book industry in the digital age. He is an adjunct faculty at the University of Delaware’s Business School, CUNY SPS and the New School, teaching courses in green business and new product development.