Caught in the Cultural Crossfire

Regardless of which side of the fence you sit on, the flap between Ford and the AFA, which continues to this day, got us to wondering whether expressions of corporate values — be it support of gay rights or donations to conservative politicians — have a real impact on the bottom line. Though we quickly discovered that a black-and-white answer is hard to come by, an Ivy League academic is trying to sort through the gray matter.

Joshua Margolis, professor of business administration at Harvard Business School, says companies and their top executives are increasingly likely to be caught in the cultural crossfire when it comes to controversial social issues. And more and more they're faced with the dueling pressure of achieving outstanding financial performance as well as meeting certain standards the public holds them to.

Indeed, after the boycott threat Ford execs decided to withdraw the disputed ads, but then reversed that decision. After back-pedaling the company said it intended to continue its practice of advertising in gay media. The AFA reinstated its boycott in March.

Margolis, along with two colleagues, is completing an analysis of current data on the subject. The researchers consolidated the results of 167 studies to determine the relationship between corporate social performance and corporate financial performance. Generally, Margolis says, the studies find a mild positive correlation between the two. In other words, social consciousness tends to benefit the bottom line — at least eventually.

"There are some studies that suggest it operates a little like advertising, in that it contributes to general goodwill, good feeling toward a brand or company, and it creates an awareness, a cushion in case something goes bad," says Margolis. "The companies that had better social performance, when something bad happened in the industry, they suffered less of a loss in share price."

Here's what else the Harvard professor had to say about the risks and rewards awaiting investors when corporate America wears its values on its sleeve.

SmartMoney.com: What are the findings from your latest study on the relationship between a company's social values and its financial performance?

Joshua Margolis: [My colleagues and I] did a meta-analysis first on 90 studies, then 122, and now 167 studies. For 30 years people have been trying to examine the relationship between what's often called corporate social performance and corporate financial performance, which means examining a company's efforts to do good things, and how does that bear on the bottom line. "Social performance" includes everything from how diverse a board is to what a company's toxic releases are as measured by toxic release data....

There's a broad range of indicators used to measure social performance. Every few years there's an effort to consolidate what the findings are. In general, all of these studies find a positive correlation. Now, when you look at the studies, methodologically there are oftentimes some problems. They don't necessarily control for risk, or control for size of the firm.

SM: Can you say how positive the correlation is?

JM: What is found is that there is a mild positive correlation between corporate social performance and financial performance. The way we like to state it is that there is no systematic evidence that committing to social values, or investing in social performance, is destroying shareholder value. Because the correlations are mild, and because there are these methodological issues, it's fair to say value is not being systematically destroyed when they try to contribute back to society or or address social ills. I think it would be valid to say that doing this for financial reasons is not necessarily the best use of investment dollars. Studies show there's no negative impact; but if you took the same dollar you'd put toward a philanthropic cause and invest it in R&D, you'd get a higher return. On the other side of the picture, there does seem to be clear evidence on the negative side. If companies violate values — and they get caught — that does do damage to the stock price. If companies do something wrong, once it becomes public, that does do damage to shareholder values. You're running some sort of risk if you're systematically going against social values.

I would say that partisans for having companies commit to social values, and those against it (who think it's a misallocation of money), I think both sides tend to overestimate the impact. The people who are dead set against it probably overestimate the damage it could do to the bottom line. And those for it tend to overestimate the positive impact on the bottom line. A sensible approach is if you're a visible company — whether because you create brand name products or you're just a big company — there is some expectation you'll be a good corporate citizen. The companies that do not contribute back in some way are seen as aberrant.

A book by one of my colleagues says that people expect companies to act like people and to follow commonly accepted values and standards. If you do well, there's an expectation you'll give back. Finding the right amount, though, is difficult.

SM: What about the Ford case? Is there a way to gauge the consequences for the company's bottom line, and possibly for investors, of a boycott like the one the American Family Association has reinstated?

JM: There's a lot of academic research now looking at this kind of thing. Whether it's sponsoring a "Race for the Cure" or taking ads out in a gay magazine, we're not clear how it is that when you commit to a social cause, what are the gears that turn and that lead to better financial performance. There are some studies that suggest it operates a little like advertising, in that it contributes to general goodwill, good feeling toward a brand or company, and it creates an awareness, a cushion in case something goes bad. The companies that had better social performance, when something bad happened in the industry, they suffered less of a loss in share price.

SM: So certain social values can serve as protection against unfavorable events?

JM: Another researcher, Caroline Bartel, did a study which showed that volunteerism at Pillsbury contributed to greater commitment to the company among those who volunteered. When a company engages in social causes — like same sex partner benefits, volunteer programs, providing space for local boy scouts, whatever it is — somehow it creates positive feelings for employees. They're more committed to the company, there's less absenteeism, and they have higher morale. It's not entirely clear what the gears are. And to complicate this example, you could have an impact of a boycott of a group like the American Family Association that gets the word out. But how would you weigh that against the impact of another strong constituency of customers, or employee base? [What if it would attract] highly talented members of the gay community who otherwise might go to another company? We're not sure what portfolio of indicators are right to gauge what customers or employees use to determine what products to buy or what company to sign on to.

The thing companies do worry about is stigma. They want to be in the headlines for good, positive things; they don't want to be in the headlines for negative things...like being known for having a sweatshop supplier.... [Harvard professor] Joe Badaracco makes the point that it's not common to see CEOs speak out about issues that are in any way controversial. They'll speak out about important philanthropic causes. Those tend to be the safe ones, which also happen to be the highest impact ones. Health care and education are the biggies.

SM: Do there seem to be more instances now of well-known companies caught up in culturally divisive issues? Is it a sign of consumers and investors being more politically cognizant?

JM: In Milton Friedman's famous article in the New York Times Magazine from 1971, he said...let companies do what they do best, which is their economic mission. I think it's reasonable to say it's a little like a sine curve. It's a potential risk factor for companies. If you do something, there's always the possibility someone will call you out on it. The world is in many ways a smaller place because of the Internet and people are aware of a company beyond its economic impact. It's an increasing source of risk; it's treated like a classic risk factor.... It does go in and out; there are moments of intensity. There's been a linear increase in the significance of social values, and at the same time [there's] a curve up and down in the intensity of it.

It may seem apparent now because, as some say, the country is more divided and polarized now.... In an increasingly polarized world, in a world where investors are increasingly sensitive to a company's returns, companies are under pressure to perform better than before; and it increases scrutiny because of the scandals of a few years ago. So you have dueling pressures.... It's easy for companies and CEOs to be caught in the crossfire.

SM: Are ethics included in "corporate values"? And, aside from the egregious ethics violations committed by the likes of Enron and WorldCom, what role do they play in helping or hurting the bottom line?

JM: Another research project I'm doing at Harvard with two colleagues is looking at global business standards. We looked at guidelines of codes of conduct and tried to distill the common elements. Now we're collecting data to determine the extent to which there's a consensus of standards, and the extent to which management and their companies adhere to those standards.

There's certainly an overlap of ethics and honoring social values. There are two broad areas: guidelines for acceptable conduct in getting your business done. The question is, are you staying within those guidelines. The other broad area would be in what way is the company contributing back to society over and above its economic mission. Both areas have been studied in this meta-analysis. The research seems to indicate that if you violate ethics standards and you get caught, it has a negative impact on the bottom line. There's a general sense that the best companies, the most admired companies, are those that have an eye on economic performance and an eye on their ethical performance as well. And that means playing within the rules of law and going beyond that, adhering to broadly accepted principles.... That's why Johnson & Johnson (JNJ) is usually held as a paragon of ethics. A lot of it dates to the way they handled the Tylenol crisis.... Their credo is famous. They debate and discuss the credo at formal sessions; what the priorities are for the company, and how in times of crisis, they draw on that set of values.