Abstract
An overlooked but important benefit of CSR is to insure a firm against a decline in reputation in the face of adverse events. Through a case study and a multi-year analysis of stock price responses for S&P 500 companies following product recalls, we find that firms that have high CSR ratings fare better than those that do not. Furthermore, a firm that is exceptional in both doing good and avoiding harm suffers virtually no reputational damage following negative media publicity. Using the results of this study, we offer a guide to managers for determining the appropriate amount and mix of CSR activities.
Highlights
For many firms, the most precious asset, the key to sustainable competitive advantage, lies not on their balance sheet nor in the human capital of their workforce, rather it is their reputation
We offer a framework to enable managers to think through the cost-benefit calculus of corporate social responsibility (CSR) as reputation insurance
Why should firms engage in CSR activities? Many rationales have been offered with varying degrees of success[9]
Summary
The most precious asset, the key to sustainable competitive advantage, lies not on their balance sheet nor in the human capital of their workforce, rather it is their reputation. Likewise Dell, who became the leading PC manufacturer largely on the basis of quality and low price, has suffered reverses in recent years owing to incidents of laptop batteries catching fire and other quality control problems, contributing to the firm’s cumulative loss of a third of its market value.[2] In short, reputational risk is one of the key business risks that firms face. We will argue that a firm’s corporate social responsibility (hereafter CSR) activities have the effect of providing partial self-insurance against reputation risk. To support this claim, we first briefly sketch a theory showing the link between CSR and a firm’s reputation. CSR as reputation insurance only works when a firm is consistent in its application
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