It's still unclear how much a company profits from doing good, but a new study of international executives shows it certainly doesn't hurt business
It is one of the biggest questions in corporate governance: Is there really any financial payoff for promoting enlightened social, environmental, and ethical practices? Or are companies that get the most attention for doing good merely those that can afford to do so?
An extensive survey of 1,254 international executives (half from the C-suite; 26% of them chief executive officers) by the Economist Intelligence Unit on corporate responsibility doesn't exactly answer this chicken-or-egg riddle. But it does reveal at least one interesting finding: The business community clearly believes that such a causal relationship exists. And that means the interest in social and environmental concerns is unlikely to abate soon.
Do-Gooders Stay Competitive
Companies that pay the most attention to so-called sustainability issues, such as climate change or treatment of workers in developing nations, far outperform those that do not, concluded the study, titled "Doing Good: Business and the Sustainability Challenge." The study was sponsored by several blue-chip companies, including Bank of America (BAC), Orange, A.T. Kearney, and SAP (SAP).
Do-gooder companies that were surveyed saw profits rise 16% last year and enjoyed price growth of 45%. Companies that rated their own sustainability practices poorly registered only 7% profit growth and 12% price growth. While not necessarily proving that it pays to be good, says Gareth Lofthouse, the EIU director who supervised the survey, "it scotches the idea of skeptics who say that if you adopt corporate social responsibility practices you will become uncompetitive."
The EIU did not collect historical data on corporate financial performance and corporate responsibility practices, so it's not clear if last year's performance was an aberration. But asked to cite the biggest benefits to the company from sustainability practices, the ones mentioned most—by around one-third of respondents—were drawing customers, boosting shareholder value, and increasing profits. Only 6% agreed with the statement: "No benefit expected beyond compliance with regulation."
Executives Seek Uniform Regulations
Such belief in a financial-performance link partly explains the remarkably strong support for a commitment to sustainability, a buzzword that became common in Europe more than a decade ago but only recently gained traction in the more bottom line-obsessed U.S. A full 53% of executives surveyed say their companies already have sustainability strategies of some sort, and another quarter say they plan to develop one. In other words, only one in five companies say they have no plan and do not plan to have one. "It is overwhelmingly clear from this response that senior executives cannot afford to ignore this issue," says Lofthouse.
What's more, there no longer seems to be much of a "continental divide" on key sustainability issues. Roughly 40% of executives in both Europe and the U.S. said that more regulation is required for key social and environmental issues. Around half said they prefer voluntary measures by companies, but agreed that some tougher regulation is required. Fourteen percent of American execs said no more regulation was needed, compared to only 10% globally.
Whether the corporate world is motivated more by genuine conviction or by self-interest is another matter. The main reasons executives would like to see stronger government regulation, Lofthouse figures, is that they want greater policy consistency and a better understanding of what will be expected of them in the future. Currently, environmental rules in the U.S. can differ radically from state to state.
There also is some evidence that corporations are concerned mainly about their images. Asked to name the highest priority of their corporate responsibility programs over the next five years, 61% cited communicating their practices to investors and stakeholders as either a "leading" or "major" priority. "That means a lot of companies still think of this in terms of public relations," Lofthouse says. Nevertheless, clear majorities also cited reducing environmental damage from their products and developing products that help reduce social problems as top priorities.