Corporate Social Responsibility: Why Directors Should Care

Corporate Social Responsibility (CSR) is increasingly viewed as a topic of strategic importance. The vast majority of Fortune 1000 companies now engage in social and environmental responsibility activities, and CSR spending has reached unprecedented levels. For example, in 2010, Walmart gave more than $340 million in cash to charity, and Alcoa gave away 6.2 percent of its pre-tax profit. Keep in mind that these numbers represent only a portion of total CSR spending; others include environmental initiatives, volunteering programs, and workplace safety.

With the stakes so high, one might expect CSR to be a priority among corporate directors. Yet many directors remain wary, skeptical the CSR makes business sense, and unsure whether CSR even belongs under their purview. The truth is, CSR can have lasting effects on the competitive standing of a company, and this makes it critical for directors to add their voice to the conversation.

CSR presents both upside potential and downside risk. The upside potential of CSR is considerable. For example, my research shows that if managed correctly, CSR has the potential to enhance customer loyalty, intent to invest in company stock, employee engagement, and customer service delivered by employees. A colleague’s research even shows that companies that are more engaged in CSR tend to be more innovative, introducing more products than their peers.

Perhaps less understood are the downside risks of engaging in CSR. CSR can backfire for a number of reasons. One surprisingly common scenario is an executive who addresses a “pet project” without the support of other stakeholders; despite the executive’s best intentions, these initiatives are often wasteful and subsequently jettisoned when the executive quits. A second recipe for failure is engaging in CSR without any clear business objectives. Without social and business targets, it is difficult to measure and adjust CSR strategy so that gains are maximized.

Given the upside potential and downside risks of CSR, companies need to manage CSR carefully. Directors are among the best qualified to provide thoughtful guidance on how to seize the opportunities and avoid the pitfalls. As stewards of the long-term interests of the company, directors have a – dare I say it – responsibility to make CSR part of the conversation.