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Socially responsible behavior boosts profit - if marketing is strong

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Staff writer ▼ | March 3, 2016
The decision to give to charity or develop a more sustainable product should not depend solely on a corporation's bottom line, but it is certainly a factor.
Donation to charity
Responsibility   Balancing between community and shareholders
That can complicate the situation for managers who must balance between doing good and keeping shareholders happy, said Sachin Modi, an associate professor in Iowa State University's College of Business.

According to a new study by Modi and Saurabh Mishra, an associate professor at McGill University, a strong marketing department is crucial to helping a firm leverage its efforts to be socially responsible.

The study analyzed six different types of CSR - environment, products, diversity, corporate governance, employees and community - to determine whether marketing of these efforts increased long-term firm value and stock price.

Researchers defined CSR as discretionary firm activities aimed at enhancing societal well-being.

Study results show the combination of marketing and CSR can provide shareholders with a 3.5 percent gain in stock returns.

In the paper, researchers explain that this translates to a $242.34 million gain in stock value, based on the average market capitalization of firms in their sample.

However, Modi says the return is dependent upon the type of activity. Firms benefited from five of the six types of CSR efforts studied, with the exception of charitable giving and philanthropy, he added.

There are a couple of reasons as to why this may be the case. Often managers pick charitable initiatives based on their personal interests, without considering the broader impact for all stakeholders in the firm, such as consumers, employees and suppliers, Modi said.

Charitable giving is also harder for the consumer to verify independently, and doesn't always motivate them to buy the product.

The biggest payoff comes from letting shareholders know about a firm's efforts to improve products, be environmentally friendly, create a diverse workplace and use sustainable resources.

But Modi says it's important to note this return is not a guarantee for all firms. It depends on effectively communicating and executing a strong marketing strategy. A weak marketing department generally translates to weaker returns or payoff.