Peer Pressure a Burden After Corporate Catastrophe

Contrary to previous findings, CSR might not always act as a risk management tool, with a new report suggesting companies with the strongest CSR initiatives stand to lose the most in the aftermath of catastrophes such as Bangladesh’s Rana Plaza factory collapse.

Guilt by Association: The Cost of Corporate Social Responsibility and Activist Pressure after a Catastrophe by Susan Kayser of the Stephen M. Ross School of Business at the University of Michigan showed that while catastrophes increased pressure upon all companies in the industry of the incident, those with the most advanced CSR programs were subject to the greatest punishment in the aftermath as they were pressured to be example-setters.

Those companies were losing out because they were expected to be the ones implementing costly self-regulation to lessen pressure on the industry as a whole, shedding firm-value as a result.  

According to the report, catastrophic events, such as chemical leaks, factory fires and oil spills can create a reputation problem for industries because they increase public discontent with the industry overall, thereby increasing the risk of boycotts, social movement pressures, and even lobbying for regulations.

It said stakeholders often could not distinguish among firms based on their past social or environmental performance, and therefore they punished all firms by association.

“Unfortunately, reputations can be difficult to manage because the actions of other firms in an industry can shape a firm’s reputation for the better or for the worse,” Kayser said in her paper.

“Catastrophes such as the Exxon Valdez oil spill and the Union Carbide gas leak can shift stakeholder perceptions of an entire industry, not just for those firms that are responsible for the accident.”

Kayser, who based part of her research on the 2013 garment factory collapse in Rana Plaza, Bangladesh argued that CSR initiatives might, however, still help firms preserve value in the particular case that by advertising their superior performance, those firms could effectively separate themselves from the negative perception of the industry.

She said that three factors influenced the impact of catastrophes on firm-value overall:

1) the degree to which a firm will be expected to respond by self-regulating

2) the extent to which a firm can distinguish itself as a “good” performer

3) a firm’s likelihood of being targeted by activists.

“My results suggest that CSR initiatives may signal to financial markets that the firm will be subject to stronger pressures to make further costly improvements to their social and environmental performance that will benefit the industry’s overall reputation,” Kayser said.  

“Yet, the results also suggest that CSR initiatives might help preserve firm value specifically when firms can leverage their CSR by signaling to customers that they have taken steps in the past to be socially responsible.”

In recent years Australian companies have been caught up in large-scale corporate catastrophes, including the Rana Plaza factory collapse in which 1,100 workers were killed.

No Australian company made clothes at Rana Plaza but many, including The Just Group, Best and Less, Rivers and Pacific Brands, Kmart, Target and Big W, were pressured by activist organisations such as Oxfam in the aftermath to commit to protections for workers’ safety. More than 100 Western firms including  Kmart, Target and Big W ultimately signed the legally binding Bangladesh Fire and Building Safety accord.

Read the paper here.