Strategy is about finding investment opportunities for incremental returns on strategic capital allocation.

If you are trying to do well while also trying to do good — if you sincerely care about your company’s investments in corporate social responsibility (CSR) — you might feel like these investments are just a cost of doing business in the current competitive environment. 

New research published by Leandro Nardi and colleagues in the journal Strategy Science, though, reminds us of a competitive truth: Customers are willing to pay for products and services that are unique from others in your market.

Their main result: You can generate positive market returns on corporate-social investments, or investments in environmental, social, and governance (ESG) issues, by developing a portfolio of unique CSR activities specific to your own company. Maybe your investments in CSR can be more than a sunk cost.

Is CSR just a sunk cost of doing business?

You have no doubt experienced and responded to the increasing emphasis on CSR, ESG and stakeholder capitalism in your own business and industry. You know that simply publishing an annual CSR report is not going to drive incremental returns in today’s competitive market.

The conclusions from academic research on CSR activities have been pretty grim as well: Investments in CSR do not deliver extraordinary returns on invested capital.

A company’s CSR activities, more often than not, are a net cost. Those costs may very well be a critical and even necessary cost of doing business, but they remain a cost nonetheless. 

According to two leading scholars in this area, Ioannis Ioannou and George Serafeim (bit.ly/39sENMy): “Common sustainability actions are not associated with any measures of performance.” Investments in CSR, on average, do not lead to increases in market returns. They go on to observe that issuing a CSR report of some sort has become the industry norm, regardless of your industry.

The economics are relatively straightforward.

Another article by Nardi (bit.ly/3MrRF4c), this one in the Academy of Management Review, explores in his words “the economic incentives that may lead firms to engage in substantive or symbolic CSR.” You might know symbolic CSR by the term “greenwashing,” or when a company says it is environmentally conscious for PR but isn’t actually creating any actionable sustainability efforts. His research explores how to incentivize more substantive investments in CSR over symbolic ones. OK, after looking at his mathematical models and proofs in the article appendix, the economics of CSR do seem kind of complicated …

All of strategy is about uniqueness – and so is CSR strategy

Todd Zenger, who is also a co-author with Nardi on the paper we’re exploring here, has written extensively about uniqueness, including in his book “Beyond Competitive Advantage.”

Uniqueness requires accumulating and deploying the company’s assets and capabilities in a distinct way — customers are willing to pay you for uniqueness because by definition they cannot acquire it from a competitor.

Here’s the motivating question: Does your company follow the standard industry formula for corporate social responsibility or do you pursue a unique strategy?

The research by Nardi, Zenger, et al. looks at the CSR activities and financial performance of 2,093 firms from 2002 to 2017, yielding 12,469 observations.

The primary dataset comes from Thomson Reuters, whose analysts score firms over 900 distinct CSR categories every year. The scores are standardized to provide an annual ranking for each firm in each category. For this research, the authors focus on eight of the most relevant categories specific to environmental (like resource use reductions) and social issues (like employee diversity).

To calculate the “uniqueness” of a company’s CSR strategy, the authors do a bit of fancy math that essentially compares a measure of each company’s aggregated ranking across its portfolio of CSR activities to the average of all other companies’ CSR portfolio rankings in the same industry.

Put another way: They calculate how different the company’s CSR portfolio is from the industry’s average portfolio — a higher score means that the company pursues a different CSR strategy than the industry as a whole, meaning that company has a unique CSR strategy.

In their initial test, consistent with prior research on CSR, Nardi and colleagues found no significant association between CSR and company performance. A company’s CSR activities appear to be just a cost of doing business.

Their main finding, however, shows that firms pursuing unique CSR strategies do indeed experience significantly higher market returns. To provide economic context for their results: They calculate that a relatively normal increase in uniqueness leads to an 11% increase in market value.

Uniqueness and authenticity

Two books authored by recently retired CEOs provide insight for this discussion of CSR uniqueness and performance.

The first book is “My Life in Full” by Indra Nooyi, the former chairperson of the board and CEO of PepsiCo.

More than a decade before the Business Roundtable published their CSR manifesto, Nooyi recognized the importance of CSR for PepsiCo. She defined her theory of corporate strategy as “Performance with Purpose” (PwP). 

She writes: “We would deliver excellent performance, as was expected for PepsiCo, but would add three imperatives to our work ahead: nourish humanity and the communities in which we live, replenish our environment, and cherish the people in our company. This wasn’t corporate social responsibility or philanthropy focused on giving our money away. PwP would transform the way PepsiCo made money and tie our business success to these objectives: Nourish. Replenish. Cherish.”

The key is that Nooyi was focused on creating a CSR strategy unique to the company’s specific assets and capabilities.

She also faced tremendous pressure to perform, including revenue growth targets of 4% annually ($2.5 billion in new sales every year) and similar profit growth targets. “Earnings are the ticking clock for every CEO,” she writes. 

The second book, “The Heart of Business” by former Best Buy CEO Hubert Joly, is particularly instructive because he laid out the principles of his CSR initiatives when the company was confronting obsolescence in the face of competition from Amazon.

He writes that Best Buy defined its purpose “to enrich lives through technology by addressing key human needs,” with a distinct focus on the areas of entertainment, productivity, communication, food, security, and health and wellness. Similar to PepsiCo’s Nooyi, Joly relied on this stated purpose as “a guiding North Star against which strategy is formulated and every decision made and measured.”

Closer to home, I had the pleasure of attending the Business Record’s recent panel discussion on the community and social impact of business. All of the panelists spoke eloquently about the opportunities for our local companies to engage in CSR activities.

One consistent theme across the panel was authenticity.

Tanner Krause, CEO at Kum & Go, spoke about it directly: “It comes down to authenticity. We can’t be everything on every issue. We have to choose what’s authentic to us.”

Jo Christine Miles, director of the Principal Foundation and community relations, followed that up: “You start with your principles and your stated purpose. There are a lot of great causes out there, and you can’t do everything.”

Eileen Wixted, expert in public relations and principal at Wixted and Co., succinctly summarized the sentiment: “You can’t put PR before your purpose.”

Both former CEOs Nooyi and Joly also write about the importance of authenticity in their books.

It is important to note that the research led by Nardi does not equate authenticity to their measure of uniqueness. They hypothesize the underlying mechanism for increased performance is that “unique CSR strategies more effectively generate rents from stakeholder engagement.” 

Your unique CSR strategy will attract and engage stakeholders that together can help your company create unique value. When choosing investments in CSR, consider how best to match your company’s unique assets and capabilities to its stated purpose.

I’d like to end with a book we read in my MBA Corporate Governance and Ethics class, “Conscious Capitalism: Liberating the Heroic Spirit of Business,” by Whole Foods Market co-founder and CEO John Mackey and author Raj Sisodia: “Having a higher purpose is the starting point of what it means to be a conscious business: being self-aware, recognizing what makes the company truly unique, and discovering how the company can best serve.”

---

Editor’s note: Carl Vieregger will periodically write for the Business Record about academic research related to business strategy that leaders should be thinking about. Have an idea you’d like Vieregger to look into? Email him at carl.vieregger@drake.edu. 

Fodder for this piece came from: “Doing Well by Doing Good, Uniquely: Materiality and the Market Value of Unique CSR Strategies,” by Leandro Nardi, Todd Zenger, Sérgio Giovanetti Lazzarini and Sandro Cabral, in Strategy Science. bit.ly/3sCi9rF