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10.13007/194

Ideas for Leaders #194

CSR - Why Companies Need Activists

Key Concept

A company’s positive or negative impact on society can enhance or harm its

reputation. New research from Northwestern University’s Kellogg School of

Management shows that passionate activists play a key role in ensuring that

companies remain socially responsible. If they push too hard, however, the

efforts of these same activists become counterproductive. On the corporate

side, the research explains why corporations must never let up their socially

responsible activities.

Idea Summary

Many customers care about the societal costs of a company’s activities —

pollution or depletion of resources, for example — and thus companies have

an incentive to pay attention to their impact on society. They want to keep

their reputation intact.

But what if your company already has a rock-solid reputation? Is there any

reason to spend more money on socially responsible activities? Research by

Kellogg School of Management professors David Besanko and Daniel

Diermeier — joined by former colleague Jose Miguel Abito — demonstrates

that the law of diminishing returns for companies that already have a good

reputation does indeed apply. According to Diermeier, “The payoff for

investing more, and being more social responsible, likely diminishes over

time.”

However, the team’s research found that activists play an important role in

defining corporate CSR activities. Activists are dedicated to ensuring that

companies become or remain socially responsible, and they do so in two

ways: criticism or confrontation. Criticism can have an impact, but

sophisticated confrontation tactics, such as boycotts or massive

demonstrations, can create a crisis of dramatic proportions. Thus, the

presence of activists explains why companies continually invest in efforts to

improve their image and reputation.

Activists have to be careful, however, according to the researchers. If they

rely only on criticism, they are less likely to have an impact on corporate

behavior. However, if they are constantly inducing crises — that is, they use

confrontation to an extreme level — the targeted corporations are going to

assume that they can never gain from engaging in social responsible

activities, and essentially give up their endeavors. Why spend money if there

is no impact on reputation?

The study, however, shows that activists — especially those who have the

patience and resources for long-term campaigns — do have a generally

Authors

Abito, Jose-Miguel Abito

Besanko, David

Diermeier, Daniel

Institutions

Kellogg School of Management

Source

Working Paper

Idea conceived

January 2013

Idea posted

August 2013

DOI number

Subject

Corporate Social Responsibility

Reputational Risk

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positive impact on the social responsibility of a firm. This is especially true for

firms who do business where there is little governmental oversight, as in

developing countries. As the researchers write, “Our welfare results thus

suggest that the activist can be a positive force for society, perhaps especially

in circumstances in which public regulation is either infeasible or operates

poorly because of corruption or other governance problems.”

Business Application

The study reveals what corporations may find to be a frustrating facet of

activism — it’s the companies who care about the reputation who are more

likely to be attacked by activists. The researchers point out the logic behind

this phenomenon: if a nationally owned company from a developing country

doesn’t care about its environmental record, it will not respond in any way to

the efforts of activists; why, then, should the activist waste time and money on

them?

What can companies learn from the research? First, that their most dangerous

adversaries will be the patient, established activist organizations. Royal

Dutch/Shell underestimated the power of Greenpeace as it sought to dispose

of its Brent Spar oil story buoy. The resulting confrontation, in which the oil

company used water cannons against Greenpeace demonstrators, had a

significant negative financial impact.

Second, that lack of public oversight does not lead to freedom from social

responsibility. The rise of globalization saw corporate activities expand into

regions and countries that did not have the same public oversight (from

government regulatory or private organizational bodies) present in more

developed countries. However, as Western clothes manufacturers careless

about conditions in their overseas factories discovered, activists can fill the

regulatory gap through a combination of criticism and confrontation. Private

regulation — involving the activists who push companies to act responsibly,

and the corporations who respond accordingly — is a powerful factor where

public regulation does not exist.

Further Reading

“Corporate Reputational Dynamics, Private Regulation, and Activist Pressure,” Jose-

Miguel Abito, David Besanko, and Daniel Diermeier.

“The Games Companies and Activists play,” Jose-Miguel Abito, David Besanko, and

Daniel Diermeier, Kellogg Insight, 1 July 2013.

Further Relevant Resources

Jose-Miguel Abito’s profile at The Wharton School of the University of Pennsylvania

David Besanko’s profile at The Kellogg School of Management

Daniel Diermeier’s profile at The Kellogg School of Management

Kellogg School of Management Executive Education profile at IEDP

© Copyright IEDP Ideas for Leaders 2013

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