Does Responsible Business Make Business Sense?

There has been renewed interest in the idea of ‘responsible business’ (the responsibility a business voluntarily takes for its social, economic, and environmental impacts) in recent years as businesses re-evaluate their role in fractured, rapidly changing societies.

In today’s uncertain business context, one of the most influential drivers of responsible business is believed to be the business case. Organisations today can ‘do well by doing good’, the argument goes, linking responsibility and profitability to build and sustain competitive advantage.

But is this always, or often, so?

As part of the research for our upcoming report and Masterclass, Responsible Business: How Can HR Drive the Agenda?, we took a look at the evidence.

We found that there are three key stakeholder groups that drive the business case for responsibility: customers, employees, and investors.

  • Customers drive the business case for responsibility in two ways: positively, by creating a market for responsible goods and services, or negatively, by boycotting the goods and services of a company perceived to be irresponsible. There is some evidence of a ‘market for virtue’ whereby customers are driving the growth of responsible goods and services.
  • Employees are believed to drive the business case for responsibility in several ways. Organisations whose employer brands have a strong ethical component are believed to be better able to attract and retain high-quality employees. These employees go on to be more motivated, more engaged, and more deeply committed to the business. This, in turn, can drive innovation and efficiencies, such as reduced turnover. There is research evidence to support this argument.
  • Investors can drive the business case for responsibility positively or negatively – by investing capital, or withholding investment. There is extensive anecdotal and research evidence that investors are increasingly taking responsibility (typically referred to as ‘ESG factors’ in the investment community) into account when they make investment decisions, and some evidence that companies who do well on ESG have superior performance.

In short, research evidence links responsible business to improved outcomes in financial performance, operational efficiency, innovation, reputation, access to capital markets, employee attraction and retention, employee commitment, motivation, and engagement, cost and risk reduction, and license to operate, among others.

However, we also found a number of general methodological critiques of much of the research evidence linking responsible business behaviour to improved organisational performance. Causality is an issue. Does responsible business behaviour lead to better financial performance, or do firms that perform well financially have more leeway to behave in responsible ways? Omitted variables are another issue. Is improved financial performance a consequence of responsible business behaviour, or some other factor, such as a generally favourable economic climate or the quality of management? Are the measures valid? Are they consistent?

Altogether, meta-reviews have made nearly 50 unique methodological critiques of the broader body of research on responsible business and organisational performance. There is also a larger question about the link between responsibility and performance over the long term, given that the research generally over-relies on cross-sectional studies. Finally, companies that have performed astoundingly well over the long-term do not necessarily have strong reputations for responsibility.

This begs the question: to what extent is responsibility driving performance, as opposed to the larger vagaries of the market?

On balance, we find that the business case for responsibility is strongest for those organisations that have made responsibility key to their customer attraction and retention strategy, and those highly visible global companies that have been targeted by, or fear being targeted by, activists. At the same time, there is still a market for the products and services of less responsible businesses.

However, it is also important to note that in our research, we found no evidence that doing business responsibly comes at a great cost. There is no evidence of businesses folding because they were overly focused on responsibility, or of responsibility initiatives leading to declines in share prices, investment, or sales.

Doing business more responsibly may or may not drive financial or other types of organisational performance – and for some businesses sometimes, clearly it does – but equally the research indicates that it costs businesses little or nothing. In a time of rapid and enormous changes and challenges – to the environment, to economies, to societies – we believe businesses will experience an inexorable shift toward responsibility if they want to maintain optimal business conditions and their social license to operate.

 

For a deeper dive into the whys and hows of Responsible Business, join CRF at our upcoming Masterclass ‘Responsible Business – How Can HR Drive the Agenda?’, where you will also receive a copy of our full research report.

(To find out more about this programme and to register your attendance, please contact Rachel Flax at rachel@crforum.co.uk).

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