August 19, 2006

Can corporate social performance actually help a company's bottom line? Finding a connection between social and financial performance has proven elusive for both academic and corporate researchers, with disappointingly varied results. But according to a new model focused on consumer behavior from Rice University, the secret may lie in the ways companies disseminate information about social programs and how they segment markets based upon customers' values.

As the concept of corporate social performance (CSP) gains credence throughout the business world -- with firms spending millions on social programs such as better labor practices and environmental stewardship -- the obvious and inevitable question is whether such programs help the bottom line. Up until now, both academic and internal corporate studies have delivered only equivocal results. Instead of trying to find some direct correlation between social and financial measures, as previous studies attempted, a new research model by Rice University's Douglas Schuler and Margaret Cording views consumer behavior as the key ingredient to understanding the potential relationship. "What we found that could be powerful for some companies is that there's potentially money to be made from these social activities," said Schuler.

The paper, published this year in the "Academy of Management Review," first considers how firms convey information to the public about their social programs. It then looks at how consumers use (or don't use) that information in their purchasing decisions. One of the keys to the purchase is the consumer's moral orientation. The authors, both professors at Rice's Jones School of Graduate Management, argue that a company's social activities can lead to financial gains by impacting consumers' decisions only when there is ample information about a company's social performance and the consumer is more focused on others as opposed to themselves.

The academic community will now test and use the model, but the new research also offers some immediate real-world implications for managers. The most significant is in the ways firms segment their markets. The authors argue that some consumers give more weight than others to information about companies' social performance, and that understanding who those consumers are would allow companies to target their CSP messages accordingly.

"A bunch of men watching an NFL game together probably don't care as much as a woman watching Lifetime whether Budweiser has a program to support needy children," said Schuler. "If you can segment your customers on certain ethical characteristics, you'll have a better idea of what you have to gain from these social activities."

In addition, the authors argued that the message about a company's social performance programs is more powerful if it comes from a third party not connected to the company, such as a media outlet or a social watchdog organization. "I trust Nike less than the 'San Francisco Chronicle' or Human Rights Watch," said Schuler, suggesting that managing relationships with these third-party groups is thus critical.

Companies with a positive CSP image also need to be vigilant to maintain that image, because they have the most to lose if an unfavorable item about the company comes to light.

"It's almost a tabloid-type proposition. We live to find dirt about the stars, so companies that have these very strong reputations really need to be careful to not have some internal scandal or something else of the sort come to light," said Schuler.

To arrive at these findings, the behavioral model first addressed three factors relating to how companies spread the word about their social programs: the information's source, how diffused the message is and how that message correlates to the firm's existing CSP reputation. The logic is that even if a company has social programs, it won't lead to better financial performance unless stakeholders such as consumers know about them. If this information makes its way to consumers, the buyer's moral compass then plays a key role in the final buying decision, according to Schuler and Cording.

The authors limited their study to consumers (as opposed to other stakeholders, such as investors and employees) and looked exclusively at buying behavior connected with "high-involvement" goods like cars and home electronics, since consumers are more likely to research these purchases -- and thus evaluate CSP information -- compared with daily household goods that they might buy out of routine.

Together with a marketing faculty member at Rice, Schuler and Cording plan to test their model soon with a consumer survey.

Schuler also has previously published research on corporate political and social strategies. He earned his Ph.D. from the University of Minnesota in 1992. Cording came to Rice University in 2003 after completing her Ph.D. at the University of Virginia. She primarily researches business strategy and ethics.

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