March 31, 2022 • By Keith Giles
Corporate Social Responsibility, or CSR, demands that businesses care for more than just profit. Somewhere in the middle of the bottom line and bottom dollar are opportunities to do good, by the world and by people. Consequently, the outcome is an unexpected competitive edge that brings a hefty price tag at its beginning stages. Professor of Accounting Joanna Ho of The UCI Paul Merage School of Business has studied CSR for a long time. In a recent study, she and her colleagues discovered that doing good for people and the world also does good for business.
“I’ve always been very concerned about issues like global warming and child labor,” says Ho. “But many corporations tend to approach CSR in terms of how much it’s going to cost them because it can be very expensive. No one talks about CSR from an ROI perspective.”
To examine the potential benefits of CSR for businesses, Ho teamed up with Fu-Hsuan Hsu of National Taiwan University and Chia-Ling Lee of National Chengchi University. The results of their study will be published in an article titled “Business Strategy, Corporate Social Responsibility Activities, and Financial Performance,” forthcoming from the Journal of International Accounting Research.
With CSR, one size does not fit all
Businesses naturally favor activities that increase profits over initiatives that do not. Conventional thinking suggests that CSR is not a source of profit growth. Ho and her colleagues set out to determine if that thinking might be misplaced. “We wanted to know if CSR could become a competitive advantage, rather than merely an expense if companies can approach it in the right way,” Ho says. “If so, how can we demonstrate the ideal balance between the two?”
As Ho and her team began to find answers to these questions, another factor emerged. “We were really curious about how the alignment between different corporate business strategies impacted the ways CSR impacts the bottom line,” she says. “Some companies are positioned in their market as a defender, or a price leader, like Walmart. On the other hand, more innovation-based companies, such as Apple or Nordstrom, are considered prospectors. What sort of CSR activities make a stronger financial impact for these different strategies?”
Most research into CSR has lumped companies together without differentiating between the types of company strategies. “We are already aware that there are a variety of CSR initiatives out there,” says Ho. “Companies can focus on the environment, diversity, human rights or other charity-based giving. Some of these are internally focused, and others are more externally focused. Not all CSR activities are the same.”
Digging into the data
Ho and her research partners knew where to find the financial data to discover answers. “The earnings and accounting information and stock return data we needed were already available for faculty and students at the Merage School,” Ho says. “The only thing we were lacking at the time was the corresponding CSR activity of those companies.”
Thanks to a generous research grant, the team gained access to the social research database maintained by KLD Research & Analytics, Inc. They used the database to examine the 3,000 largest companies in the U.S. “By looking at the top 3,000 U.S. companies, we knew our results would be very convincing.”
So, what did they find? “Luckily, our results supported our hypothesis,” says Ho. “Of course, in academia, you’re always aware that some might doubt your results based on your narrow definitions and limited variables. We intentionally ran a slew of alternative measures for business strategies. Not everything is black and white and there are always questions about how to categorize.”
Sorting through the CSR data raised important questions. “While everyone can agree that employee relations are internal and environmental activities are external, some activities like diversity that aren’t so obvious,” Ho says. “We ran different measures for internally vs. externally focused CSR activities and compared results for the various categories, and the results were quite robust.”
The right kind of responsibility is good for you
As they suspected, the positive impact of CSR on a company’s bottom line was directly related to the alignment of the organization’s business strategy with certain types of CSR focus.
Whether due to public pressure or social awareness, CSR is becoming less of an option and more of a necessity. But thanks to Ho’s research, companies can make better choices about the types of CSR activities they embrace, depending on their business strategy, to better serve the public and increase their market share.
“If a company is more of a price leader, they should be focusing more on employee benefits, development, and training. If they’re more of an innovator, our research demonstrates the importance of external CSR activities,” says Ho. “We’re not saying they should put everything into one category. But there really is an ROI to CSR if you understand how to align your business strategy properly.”
Joanna Ho is a professor of accounting at The UCI Paul Merage School of Business and former editor-in-chief (senior editor) of the Journal of International Accounting Research. Holding a BBA and MBA from the National Taiwan University and a PhD from the University of Texas at Austin, Ho is a noteworthy researcher whose work is showcased in publications and presentations worldwide. In addition to her worldwide journalistic accolades, Ho is the recipient of many designated awards, including the KPMG Peak Marwick Research Opportunities in Auditing Grant, GSM Excellence in Teaching award and University-Wide Celebration of Excellence in Teaching award.