The Impact of Social Pressure on Financial Performance

Most executives across every industry will acknowledge that social pressure can negatively impact financial performance.  If you are doubter consider the cases of Nike and Walmart, who saw their corporate reputations tarnished and revenues impacted due to aggressive social pressure stemming from child labour practices within their Asian supplier networks.  As a result of these and other cases, many companies have implemented a series of strategies under the umbrella of Corporate Social Responsibility.  For most companies, CSR initiatives have been deployed to safeguard corporate reputations (and shareholder value) by pre-empting and mitigating the effects of anticipated and unexpected social and political pressures.  Examples of this pressure could include product boycotts, over-zealous regulatory enforcement, internet smear campaigns, public protests and statements to the press.

Despite the flurry of activity and funding, most executives do not understand how and why social pressures impact financial and brand performance.  A new, award-winning study published at the Stanford Graduate School of Business sheds some unique light on this topic.  The authors looked at how political and social forces impacted business performance and corporate strategy in 2,010 companies over the 1996 to 2004 period.   The research yielded some interesting conclusions:

First, there is no clear link between social pressure and social performance. Greater social pressure often leads to better social performance among companies.  On the other hand, the researchers also found the reverse is true — better social performance can lead to greater social pressure. Why?  Activists and NGOs often target firms precisely because they are responsive to social pressure.

Second, in the short-term, greater social pressure is associated with lower financial performance. Social pressure can hurt a company’s reputation, brand equity, revenue, cost structure (though higher compliance and PR spending) and morale. Initially, social pressure tends to boost corporate social performance while hurting financial performance.  Longer term and with strategic and consistent CSR initiatives, many firms can leverage superior social performance into share price increases and higher brand premiums as a result of greater demand from socially-responsible investors or differentiated market positioning. 

Third, financial and social performance are largely unrelated, except in certain industries. Within the consumer good sector, financial performance is positively associated with social performance, since consumers can directly reward a company’s socially positive behavior by purchasing its products or paying a brand premium. Among industrial companies, the opposite is true — financial performance is negatively associated with social performance. This traces to the fact that responsible behavior is often expensive, and there are no masses of consumers to directly reward an industrial company.

Fourth, “private politics” matter more than “public politics.”  The research showed that the negative financial impact of social pressure was due almost entirely to the actions of “private politics” — activists and non-governmental actors  — versus the actions of “public politics,”  those stemming from government actions 

This research is an important first step in drawing an explicit link between social pressure, CSR and financial performance.  However, more integrated research is needed to help companies understand CSR best practices that enhance shareholder value as well as determining the ROI of specific initiatives.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.


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