A company’s positive or negative impact on society can enhance or harm its reputation. New research from Northwestern University’s Kellogg School of Management shows that passionate activists play a key role in ensuring that companies remain socially responsible. If they push too hard, however, the efforts of these same activists become counterproductive. On the corporate side, the research explains why corporations must never let up their socially responsible activities.
Many customers care about the societal costs of a company’s activities — pollution or depletion of resources, for example — and thus companies have an incentive to pay attention to their impact on society. They want to keep their reputation intact.
But what if your company already has a rock-solid reputation? Is there any reason to spend more money on socially responsible activities? Research by Kellogg School of Management professors David Besanko and Daniel Diermeier — joined by former colleague Jose Miguel Abito — demonstrates that the law of diminishing returns for companies that already have a good reputation does indeed apply. According to Diermeier, “The payoff for investing more, and being more social responsible, likely diminishes over time.”
However, the team’s research found that activists play an important role in defining corporate CSR activities. Activists are dedicated to ensuring that companies become or remain socially responsible, and they do so in two ways: criticism or confrontation. Criticism can have an impact, but sophisticated confrontation tactics, such as boycotts or massive demonstrations, can create a crisis of dramatic proportions. Thus, the presence of activists explains why companies continually invest in efforts to improve their image and reputation.
Activists have to be careful, however, according to the researchers. If they rely only on criticism, they are less likely to have an impact on corporate behavior. However, if they are constantly inducing crises — that is, they use confrontation to an extreme level — the targeted corporations are going to assume that they can never gain from engaging in social responsible activities, and essentially give up their endeavors. Why spend money if there is no impact on reputation?
The study, however, shows that activists — especially those who have the patience and resources for long-term campaigns — do have a generally positive impact on the social responsibility of a firm. This is especially true for firms who do business where there is little governmental oversight, as in developing countries. As the researchers write, “Our welfare results thus suggest that the activist can be a positive force for society, perhaps especially in circumstances in which public regulation is either infeasible or operates poorly because of corruption or other governance problems.”
The study reveals what corporations may find to be a frustrating facet of activism — it’s the companies who care about the reputation who are more likely to be attacked by activists. The researchers point out the logic behind this phenomenon: if a nationally owned company from a developing country doesn’t care about its environmental record, it will not respond in any way to the efforts of activists; why, then, should the activist waste time and money on them?
What can companies learn from the research? First, that their most dangerous adversaries will be the patient, established activist organizations. Royal Dutch/Shell underestimated the power of Greenpeace as it sought to dispose of its Brent Spar oil story buoy. The resulting confrontation, in which the oil company used water cannons against Greenpeace demonstrators, had a significant negative financial impact.
Second, that lack of public oversight does not lead to freedom from social responsibility. The rise of globalization saw corporate activities expand into regions and countries that did not have the same public oversight (from government regulatory or private organizational bodies) present in more developed countries. However, as Western clothes manufacturers careless about conditions in their overseas factories discovered, activists can fill the regulatory gap through a combination of criticism and confrontation. Private regulation — involving the activists who push companies to act responsibly, and the corporations who respond accordingly — is a powerful factor where public regulation does not exist.
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