BYLINE: Sandie Taylor
DATE: Spring/Summer 2006
PUBLICATION: The McCombs School of Business Magazine
EDITION:
SECTION:
PAGES: 28 to 32

Last fall, as thousands of companies were feeling the effects of the spike in energy costs and scrambling to find more efficient ways to maintain their supply chains, light their stores and hedge fuel costs, FedEx Kinko’s was ahead of the curve.

The company established an environmental mission statement in the late 1990s after a growing number of its stores on college campuses reported a demand for more environmentally sustainable practices. Executives took team members’ and customers’ opinions to heart and aimed for maximum use of recycled materials, required waste reduction and mandated cutbacks in the amount of greenhouse gases produced.

Since then, FedEx Kinko’s has increased its use of recycled materials from 5 to 30 percent. Today about 30 percent of its store locations use renewable energy. “We went from an SUV to a Toyota Prius in terms of energy consumption,” says Larry Rogero, FedEx Kinko’s director of environmental affairs.

So when energy prices soared, the company had a real advantage. While half the company’s supply chain structure was still affected—mostly by increased costs in its manufacturing centers—the environmental policies it developed almost a decade ago proved valuable not only to stakeholders, but also to the company’s bottom line.

Rogero says the company’s view of social responsibility has evolved. “In 2003 and 2004, we started talking more holistically and realized business has a responsibility to return profits to shareholders and also be a good steward of the environment and demonstrate responsibility to the communities it’s immersed in,” he says. “We went to the triple bottom line focus.”

Walking the Walk
Watching the triple bottom line—that is, paying attention not only to financial results but also to social and environmental outcomes—means making sure a company’s actions live up to the needs of all stakeholders, including the shareholders, community, environment, employees, customers and suppliers, says Paula Ivey, a marketing and international business lecturer who teaches a corporate social responsibility (CSR) class at the McCombs School of Business.

Everyone is familiar with companies that pursued a CSR agenda as a response to negative media attention and boycotts. What’s changed is that more companies are working to avoid earning a bad reputation in the first place. They’re finding more and more reasons to proactively define their corporate values and responsibilities. And these initiatives are being delegated to newly created CSR departments and outside firms—rather than to public relations departments.

In the last five years, about half the companies in the Fortune 500 have begun publishing CSR annual reports. The reports discuss the companies’ sustainability and CSR approaches, provide their mission statements, and outline all the efforts undertaken to achieve their goals. Sometimes, the companies measure how many and to what extent each goal has been met.

What’s more, corporations aren’t the only ones keeping tabs on their actions. A report from the Social Investment Forum—a national nonprofit membership association dedicated to promoting the concept and practice of socially and environmentally responsible investing—found that $2.3 trillion were invested in SRI (socially responsible investing) mutual funds in 2005. And shareholders are increasingly becoming more involved in the practices of their companies. “A lot of people are filing shareholder resolutions to make changes,” Ivey says.

According to data from the CSR Group—a consulting and communications firm Ivey founded and operates—129 shareholder resolutions were filed against corporations for various social and sustainability issues last year. Although ExxonMobil had the most with eight resolutions, and Wal-Mart and Chevron were close behind, even companies that already have good CSR reputations —such as Ford Motor Co. and Whole Foods Market—received a couple of admonitions from their shareholders.

Ford was hit for lobbying related to the fuel economy while big-box retailer Whole Foods—which has already become a leader in purchasing renewable wind energy—was asked to improve its energy efficiency programs and performance.

Ivey attributes this to the need for companies to continuously improve their practices. She adds that shareholders who invest in companies with better reputations may hold these firms to a higher standard.

What’s clear is that CSR practices are becoming more critical to businesses than ever before. Even if it means higher operations costs, the return on CSR investment is significant across the board.

What Goes Around Comes Around
As McCombs School faculty research has found, CSR practices tend to benefit a company by adding value to its relationships with customers, employees, shareholders, board of directors and other firms.

“One of the main reasons companies go into CSR is reputation,” explains Ivey. And a brand’s reputation is very important to customers. “People are more loyal to companies who share their values and priorities,” Ivey says.

An overlap in values is also important to employees, says Caroline Bartel, assistant professor of management at McCombs. Her research has found that employees who identify with their company are more likely to stay at the firm. Even potential employees seek firms who are viewed positively by the outside world.

In her research, Bartel examined how four community outreach projects affected 250 Pillsbury Co. employee volunteers. What she discovered was that the act of volunteering regularly led employees to make favorable comparisons between their own company and the practices and policies of other organizations—in other words, Pillsbury shined.

Allowing people to work outside their normal environment and experience “boundary-spanning roles,”—such as volunteering for a nonprofit organization or being encouraged to participate in a corporate-sponsored community event—not only enhanced public perception; it was a powerful way for companies to help strengthen their status or image in the minds of their employees.

“People identify more strongly with socially desirable organizations,” Bartel says. “This is most likely driven by a basic need all individuals have for self-esteem.” For example, if the company is doing a good deed or has a positive public image, some employees see that as a reflection on themselves.

Bartel adds that employees also noticed the positive attributes of their coworkers as they volunteered together. As it turns out, teaching second graders the concept of teamwork helped the employees build teamwork skills within the organization.

In addition to improving relationships with customers and employees, participating in CSR efforts can also improve a company’s relationship with suppliers, directors and partners. Management Professor Pamela Haunschild’s research found that ethical companies are more likely to attract high-quality network partners, whereas a firm that commits unethical acts will see a decline in the quality of its network.

“The network changes in the sense that directors of good- reputation, high-profitability firms will tend to leave the board,” explains Haunschild. “The firm has to replace them with directors from poorer-reputation and lower-profitability firms.”

She adds that, on average, a firm that engages in an unethical act will see its board’s reputation ranking fall 10 points (out of 300) on Fortune’s “Most Admired” scale.

“The networks of the firms that engage in these acts also tend to lose connections,” she says. “This can have important consequences, as firms get benefits from being well connected to other firms in their networks. Networks have been shown to affect important firm consequences, including innovation, learning, and even profitability and survival.”

“One of the main reasons companies go into CSR is reputation,” explains Ivey. And a brand’s reputation is very important to customers. “People are more loyal to companies who share their values and priorities,” Ivey says.

An overlap in values is also important to employees, says Caroline Bartel, assistant professor of management at McCombs. Her research has found that employees who identify with their company are more likely to stay at the firm. Even potential employees seek firms who are viewed positively by the outside world.

In her research, Bartel examined how four community outreach projects affected 250 Pillsbury Co. employee volunteers. What she discovered was that the act of volunteering regularly led employees to make favorable comparisons between their own company and the practices and policies of other organizations—in other words, Pillsbury shined.

Allowing people to work outside their normal environment and experience “boundary-spanning roles,”—such as volunteering for a nonprofit organization or being encouraged to participate in a corporate-sponsored community event—not only enhanced public perception; it was a powerful way for companies to help strengthen their status or image in the minds of their employees.

“People identify more strongly with socially desirable organizations,” Bartel says. “This is most likely driven by a basic need all individuals have for self-esteem.” For example, if the company is doing a good deed or has a positive public image, some employees see that as a reflection on themselves.

Taking a Penalty for Progressiveness
In another recent research study, however, Haunschild discovered that companies sometimes pay a price for good behavior. For example, a company with a good reputation may be penalized more than one with a poor reputation when it recalls a product—just as a valedictorian who brings home a C would disappoint her parents more than her sibling who rarely makes good grades.

“We find they are penalized in terms of market share,” Haunschild says. “While all firms experience somewhat reduced market share after a recall, better-reputation firms suffer greater reductions than poorer-reputation firms.”

Haunschild says these companies cannot rely on their positive reputations for protection. They must stay in touch with the customer and learn from the examples of other firms and their recall experiences.

“Since they get a bigger market penalty, they need to be even more vigilant about preventing recalls than relatively poor-reputation firms do,” says Haunschild. “In other work, we find that good- reputation firms do seem to be advantaged in other ways—for example, they do seem to learn more from a given recall and turn this into fewer future recalls.”

Moving Beyond the Expected
These days, corporate responsibility involves more than contributing community service hours and avoiding recalls.

“Usually companies are recycling and contributing the standard 2 percent of profits to philanthropic efforts. This is considered a starting point for CSR,” Ivey says.

Organizations now look at their CSR plans from a holistic perspective—considering their effect on all stakeholders and ensuring the practices behind today’s profits don’t have a negative impact on the quality of life for tomorrow’s generations.

Companies are also beginning to work directly on hot issues, including HIV/AIDS workplace programs, supply chain responsibility and environmental threats like carbon dioxide and greenhouse gas emissions.

Prabhudev Konana, associate professor of information, risk, and operations management, suggests that companies can also act responsibly and support the global communities they affect by increasing their spending in rural towns and villages where they market their products.

“The goal should be to create wealth at the bottom of the pyramid, so they will spend money on the company’s products in the future,” he says. “Big companies can promote cooperative societies that are self-sustaining. They also reduce dependency on the government for social change.”

Konana recommends finding innovative ways to spread the wealth—for example, taking company getaways to rural communities or buying handmade goods from local artisans as corporate gifts.

Educating the youth of developing countries is another easy way to increase productivity, the size of the labor pool and disposable income in these areas.

“We need to move beyond giving money. We need to help others become self-sustaining and economically well off,” he says. “I think that’s much more strong and powerful. If they are economically self-dependent, they will start contributing to the economy.”

Merging and Diverging Opinions
While many companies have become more progressive in their CSR practices, some employees and consultants who work in CSR say they still meet opposition from people who believe that spending money on sustainability efforts means the company has to give up something else.

“People who don’t understand the business case for CSR think it’s either-or,” says Ivey. “Either you are performing well for your shareholders or you are being corporately responsible.”

Larry Rogero, FedEx Kinko’s director of environmental affairs, agrees. “When people hear the word, ‘environmental initiative,’ they think it’s going to cost more and it’s not going to be as good as what they’re used to having,” says Rogero. “If it costs more and it doesn’t work as well, it’s not—by definition—sustainable. Sometimes you have to go into the market and be a leader and pay a little more to make things happen.”

Ivey sites the acquisitions of socially responsible companies such as The Body Shop (by L’Oréal) and Tom’s of Maine (by Colgate-Palmolive) as evidence that CSR practices are, in fact, profitable in the long run. But, she believes the acquisitions can have both positive and negative consequences.

“It might be difficult for the companies to maintain their own values after being acquired,” she explains. “But it could be a good thing if the parent companies want to learn from and incorporate the acquired company’s sustainability practices and expand them—or at least let them run as they have been.”

After L’Oréal’s $1.14 billion purchase of cosmetics retailer The Body Shop March 16, Anita Roddick, the founder of The Body Shop, said L’Oréal wanted her company to teach them about community trade.

But according to BrandIndex—a daily measure of public perception for more than 1,100 consumer brands—The Body Shop’s “buzz” rating dropped 10 points to –4 by the end of March. Also, the public’s “general impression” of The Body Shop fell three points and “satisfaction” decreased 11 points.

Many customers who oppose animal testing have depended on the company’s ethical products for years, and some are not happy to see The Body Shop acquired by a company that does not share its values.

Campaigners against animal testing called for a boycott of The Body Shop and the Swiss multinational company Nestlé, which owns a 26 percent share in L’Oréal. Despite the fact that in early May The Body Shop reported a 5 percent growth in like-for-like same-store sales, it remains to be seen how the company will fare in the next year.

The question being raised is: How far up or down the corporate “food chain” should a company consider its responsibility? If The Body Shop is still producing its products using ethical methods, should it also be concerned about its parent company’s actions? Likewise, should Nike be responsible for the actions of the company that manufactures the rubber in its shoes?

Establishing the Yardstick
What are the universal standards for measuring these actions? While CSR reports can be helpful, the available standards are conflicting. Most companies use the Global Reporting Initiative (GRI) as their guideline for reporting and measuring CSR practices. But GRI is one of an additional two dozen national, international and freelance standards.

The International Organization for Standardization (ISO) is trying to remedy this problem by developing ISO 26000, a voluntary social responsibility benchmark intended to assist organizations in addressing and measuring their CSR approaches while respecting cultural, societal, environmental and legal differences and economic development conditions. The ISO Technical Management Board hopes ISO 26000 will give companies practical CSR guidance, while helping to increase customer confidence and satisfaction in organizations.

According to the current GRI reporting standard, Ivey says Ford Motor Co. is the first corporation that could be considered fully compliant. From Ford’s commitment to creating new emissions technology to its refurbishing of manufacturing plants to reduce hazardous materials, the company has proved to be a leader in environmental conservation and preservation.

Ford also is at the forefront of work-life balance issues with the establishment of its Family Service & Learning Centers, which offer Ford employees high-quality child care services. The company also invests in other important social issues, such as teen driving research and global education initiatives, and is well known for its funding and grant programs.

“When you talk about companies having good CSR practices, it could mean a lot of different things,” Ivey adds. “There’s no perfect company.”

In the long run, companies must think strategically about how they can best serve their stakeholders and bring the most value to both the community and the company. They’ll face tough decisions—like whether to help preserve their workforce with workplace HIV programs or fund initiatives to create energy-efficient trucks used in their supply chain. And while the benefits won’t necessarily be seen by the next quarterly earnings report, it’s clear that a company’s CSR practices are, indeed, an investment in its future.