The Trouble with Being Average

Many researchers and senior executives now agree that under the right conditions, corporate social responsibility initiatives can simultaneously create value for society while also producing valuable rewards for companies. But can multinational corporations capitalize on their corporate social responsibility investments when they expand overseas? Do multinationals profit in foreign markets by investing in corporate social responsibility? Or are social initiatives simply a costly distraction for companies seeking to generate returns from their international ventures?

On the one hand, investments in corporate social responsibility programs can enhance the legitimacy of a company operating outside of its domestic market by establishing a strong reputation for good citizenship. This reputation can smooth the path of international expansion and provide a solid foundation for international success. On the other hand, a commitment to corporate social responsibility can inhibit the ability of companies to reap cost advantages that may be available overseas.

Our research set out to investigate the relationship between corporate social performance and a company’s ability to achieve profitable sales outside its domestic market. We looked at both social performance ratings and accounting and financial data for more than 800 U.S. public companies between the years 1991 and 2003; we had an average of more than five years of data per company. (A full description of the study was published in the July 2008 issue of the Journal of Business Ethics in an article titled “The Impact of Corporate Social Performance on a Firm’s Multinationality.”)

Our analysis produced some intriguing results. Companies in our sample with low or high levels of social performance achieved far greater degrees of international success than those with moderate levels. In other words, the relationship between social responsibility and profitable sales in foreign markets is U-shaped. Companies with a low commitment to corporate social responsibility can reap cost benefits, while those with highly developed corporate social responsibility programs can build a strong reputation for good citizenship that makes a difference in international markets. However, companies with intermediate social performance struggle to reap the benefits of their corporate social responsibility investments overseas. Such multinationals risk being “stuck in the middle” of the pack in terms of corporate social responsibility.

When a company is “stuck in the middle” in its social performance, it is committing resources to corporate social responsibility and achieving some limited recognition for its efforts at home but is unable to translate that domestic recognition into a competitive advantage in foreign markets. There are several reasons why such a scenario can have a negative impact on overseas performance. Unexceptional reputations may not transfer successfully across borders. In the absence of a robust reputation for genuine leadership in corporate social responsibility, overseas stakeholders may lack the certainty that a company’s social engagement is real and meaningful; a midrange corporate social responsibility profile will be more readily dismissed by overseas stakeholders as corporate “greenwash.” The challenge will be especially acute if host countries differ in their view of what constitutes responsible business practice in the first place.

What These Findings Suggest

One implication of these findings for managers of multinationals is that investments in corporate social responsibility may lead to competitive disadvantages internationally unless a high level of social performance can be achieved and sustained. This may require some radical rethinking from managers in companies with moderate social performance. One approach would be to adopt a more rigorously competitive orientation to international corporate social responsibility efforts. From a purely commercial point of view, the findings suggest that companies should either rein in costly corporate social responsibility initiatives overseas and concentrate on social initiatives at home—or work much harder at developing social initiatives that build greater international social capital.

For companies with average social performance, cutting back on corporate social responsibility efforts overseas may seem logical given our evidence, but there are considerable dangers in backing out of social initiatives. In contrast to companies with low levels of social performance, those with relatively average performance may face resistance to social retrenchment if they are already active in the communities in which they operate. A more effective response might be to realign internally the basis for undertaking corporate social responsibility initiatives overseas from a business case argument to a moral one. Such an approach would emphasize “doing the right thing” and maintaining a license to operate rather than reaping competitive advantage.

Alternatively, if companies with average social performance seek to enhance the returns on their corporate social responsibility activities in foreign markets, our research suggests that they will need to move to a position of aspiring leadership. In practice, that will require better alignment of actions with words—and more focused investment in areas that count. To be credible, social initiatives have to be closely related to the company’s core business and part of a long-term strategic agenda. Toyota Motor Corp., for example, does not just periodically throw money at good causes; it integrates its expertise in energy efficiency to continuously strengthen a hybrid car concept that will help reduce greenhouse gas emissions and improve the company’s social reputation. Corporate social responsibility works best when it leverages what is unique about the company.

To achieve improvement in social performance, careful examination of current corporate social responsibility practices is often required. It is rare to find managers who do not talk proudly of their company’s efforts to improve the rights of workers, to help local communities surmount poverty and to safeguard the environment—for example, by recycling office stationery. While these approaches are presumably important, they are also so common that they seldom represent a source of distinctive advantage in foreign markets. Executives will need to more finely attune corporate social responsibility initiatives both to their core business and to the needs and expectations of international stakeholders. Only by concentrating on such targeted programs will companies reap rewards overseas from their corporate social responsibility investments.