Measuring CSR is difficult and is not always desirable
18 October 2013
Professor Kamel Mellahi writes on the difficulty of measuring corporate social responsibility (CSR) and how it is not always desirable
CSR differs from any other corporate activity. It deals with issues like environmental pollution, child labour and product safety which are often seen as outside the traditional boundaries of a business. Therefore, it is not easy to measure CSR performance by using traditional indicators such as return on investment. Effective measures of CSR must consider economic, social and environmental impact. And this is where it gets tricky because, to date, there is no effective means of capturing and comparing all the relevant data.
There are measures to use, but there are problems with all of them. The Reputation Index is the best. It asks expert observers to rate firms on their social dimensions, impact on the environment, and a series of other criteria. One needs to be aware, though, that there can be biases in the way data is collected and analysed. Another major limitation is that such measures look at input - how much a company spends on CSR issues – while the impact comes later and is often not observed. The rating is based on investment allocated to CSR with little regard for the real impact of each initiative.
Another popular measure is “content analysis”. Experts will study a firm’s annual reports, for example, to see how many times they refer to CSR. They then use that as a proxy for the level of CSR “embedded” in the organisation. There are problems with this as well. Firms are now expected to mention their CSR strategy in reports, to the point where absence of any mention seems odd. However, it is an imperfect way of measuring: companies can “game” the system and push themselves up an index simply by littering their reports with various keywords.
Given the diverse nature of CSR initiatives, it is impossible to separate their impact on a firm’s performance from social and economic benefits for the community. Taking the Reputation Index and its reported investment in CSR, research has found that firms doing well financially usually have a high score on the Reputation Index. We don’t know, though, where cause and effect lie or how much impact the investments actually have. Nowadays, being high up on these indexes clearly benefits a company. It helps them attract bright, well qualified graduates who want to work for an ethical organisation. Increasingly too, investors want to place their money with companies which have a strong reputation for probity and are seen to help the community. In certain ways, it does mean that firms can indeed do well by doing good.
Overall, though, I believe it is a mistake to measure the firm’s portfolio of CSR activity. What we really need is a project-based tool to measure impact. It is very difficult to conclude any meaningful causal link between a portfolio of CSR strategies and their social impact. Instead, we need to look at each project, as with a marketing campaign, and measure its contribution on a social level and as a long-term benefit for the company.
A good example is where a firm invests in its local community to raise the level of literacy. That investment can be measured, as can other projects, such as a commitment to reduce ambient pollution. When investing, companies can see results and choose the most effective schemes in future.
CSR can be measured on short-term impact. Assessing long-term impact is almost impossible because so many factors are involved, making it difficult to trace the course of change. Shareholders obviously like to know how money is being invested and why, but at the end of the day, CSR should be done as a commitment to society and not as an investment that will bring direct economic benefit to a company.
See this article featured in the South China Morning Post.
Professor Kamel Mellahi teaches International Business on the Warwick Executive MBA, Global Business Strategy on MSc Marketing & Strategy and International Business Strategy on Warwick Business School's undergraduate programme.