Wednesday, February 11, 2015

The Bottom Line: A New Reason Why it Pays Corporations to be Socially Responsible

  by Nomad

A recent study suggests that corporations that take an active interest in social cause may increase the work performance of the employees.

Some economists are still asking whether corporations should be getting themselves involved in social issues at all.

Albert Einstein once said that it was "every man's obligation to put back into the world at least the equivalent of what he takes out of it."

Duty and obligations aside, a new study by the University of Southampton, may give business owners an even more practical reason to work on social causes. It can increase productivity by up to 30 per cent.

The Selfish Benefits of Giving
Dr Mirco Tonin, the lead author of the study, said that  while the use of bonus and stock options have long been used as an incentive to improve worker performance, there's another lesser-known motivating factor.When workers are given a social incentive such as a charitable donation linked to their job, says, Tonin,  performance increases by an average of 13 percent, rising to 30 per cent among those who are initially the least productive.
"Our results provide empirical support for the growing recognition that some workers are also motivated by advancing social causes through their efforts."
The study also found that  performance was enhanced to a greater degree when workers could decide how much of their wages they wished to contribute.   More than half of the study participants chose to give a proportion of their pay to the charity they choose when the donation were optional.
"We find that offering subjects some discretion in choosing their own payment scheme leads to a substantial improvement in performance," says Dr Tonin. "This suggests that firms willing to introduce corporate giving programs may want to consider giving employees the opportunity to 'opt in.'"
The study Corporate Philanthropy and Productivity: Evidence from an Online Real Effort Experiment will be published in the forthcoming edition of Management Science.

How much money is being donated overall is staggering. Americans are not at all tight-fisted or greedy. In fact, according to Forbes, Americans give more to charity, per capita and as a percentage of gross domestic product, than the citizens of other nations.
(However, it's important to note too that about a third of all charitable giving goes to houses of worship from which the money may or may not be properly allocated to help those in need.)

In 2013, Americans gave a staggering $335.17 billion in charitable donations, a 4.4% increase from 2011. Here's a breakdown of who gave how much for 2013:
  • Individuals $241.32 billion (72%)
  • Foundations: $50.28 billion (15%)
  • Corporations $16.78 billion  (5%)
Should Corporations Really Care about Society?
In fairness, if that sounds puny amount, then we might want to also keep in mind that corporations are profit-making organizations, not charitable organizations

Some would also argue that the real contribution to society is providing its employment with a wage. Strict capitalists say that the corporation's only goal is to act on behalf of its owners, make a quality product or provide a service and make profit. That's it. 

A 2006 Forbes article by Betsy Atkins, CEO of Baja LLC, an independent venture capital firm, wrote:
It would be irresponsible for the management and directors of a company, whose stock these investors purchased, to deploy corporate assets for social causes.
Atkins dismisses this idea of corporate social responsibility entirely.
Management is charged with making informed decisions to invest corporate assets for uses that will efficiently achieve corporate goals. These include growth, profitability, product innovation, and anything else that drives the shareholders’ return on investment as measured by the stock price. What quantifiable outcome could a green headquarters produce? How could the corporation justify, in a quantifiable way, the use of shareholder assets?
There are, she says reasons why a company CEOs should want to "cloak themselves in the politically correct rhetoric of social responsibility." All well and good, she says, just as long as "significant deployments of corporate assets" are not involved.

The Tonin study, however, suggests one quantifable result of that self-interest and society responsiblity can overlap.   If the study results are accurate, philanthropy is for a corporation a win-win situation. It improves the image of the corporation to the community while making it more productive.   

Yet employees are not the only stakeholder group interested in a company’s effect on society. According to a 2014 Nielsen Global Survey on Corporate Social Responsibility (CSR),  a majority of consumers say they would be willing to pay extra for products and services from companies that are committed to positive social and environmental impact. And those numbers have increased since the last survey in 2011.

A Force for Good?
One non-profit organization, the Committee Encouraging Corporate Philanthropy (CECP) has brought together CEOs who believe that social improvement is an essential measure of business performance.
In 1999, actor Paul Newman and other business leaders founded the group.  Before his death, Newman said:
I helped to start CECP with the belief that corporations could be a force for good in society.
Today CECP has grown to include 150 CEOs of the world’s largest companies
across all industries. Revenues of engaged companies sum to $7 trillion annually.

CECP connects corporations with other influential players from the private, public, and independent sectors. Its resource guide, for example, has a long list of consultants, membership organizations academic institutions, Inter-governmental organizations and philanthropy news resources.

Overpaid CEOs with lavish lifestyles, (especially in a time of economic hardship for the rest of the country), definitely undermines the work of business leaders who actually recognize the important role that businesses play in solving complex social problems.

Last year, CECP published an in-depth analysis of 2013 corporate giving and employee engagement data from 261 of the world’s leading companies. The report contains a lot of interesting information about the present state of corporate social responsible as "a force for good." Of the findings:
  • A majority (64%) of companies increased corporate contributions to 501(c) (3) organizations, or the international equivalent from 2010 to 2013. 
  • More than a third of companies increased contributions by 25% during the same period.
(Note: This figure does not indicate whether the charitable 501(c)(3) charities or simply tax-exempt political organization. That's a very important distinction.)

Another finding which may support with the Tonin study. 
  • Giving and business performance increased together, profits increased for 59% of companies that gave 10% or more since 2010.
That's a strong motivation for corporations, if only as a matter of self-interest.