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Opening remarks at European Commission on panel about CSR and Innovation

Written by Ioannis Ioannou

This week, I was an invited panelist at the Multi-Stakeholder Forum on Corporate Social Responsibility organized by the European Commission in Brussels (http://www.csrmsf.eu/). Our panel discussed “CSR as a Driver for Innovation, Competitiveness and Growth”. It was a really insightful and engaging conversation that I thoroughly enjoyed. Here are my opening remarks:

• It’s really a pleasure and a privilege to be here with you this morning. Thank you to the organisers and the European commission for giving me this valuable opportunity to share some useful academic insights on this very critical issue of CSR.

• Partly because of growing corporate engagement, and partly because of increasing data availability and comparability across industries and geographies, a lot of academic work has taken place in the domain of CSR in the last couple of years, both theoretical as well as empirical.

• Scholars have not only focused on the big question, whether CSR pays, but the research questions have become more sophisticated: in particular, we now ask under what conditions does CSR pay, and of course, relevant for this panel is the question of, what are the mechanisms through which value may be created through CSR.

• I should note that more recent work, is slowly adapting to a new language, and rather than CSR, we begin to discuss issues of sustainability, not in terms of green strategies, but indeed, in terms of the sustainability of the business within its economic, but also within its broader social and environmental context.

• In other words, the social and environmental pressures and challenges that the world is facing have fundamental consequences on the role of the corporation in society, and the role of business. This is particularly important given that business has been traditionally viewed as part of the problem rather than as part of a potential solution to these great challenges, such as climate change, or extreme income inequality.

• So, what do we know today about how the best of firms go about implementing CSR? Well, one thing we do know well is that there are many ways to implement CSR in ways that are inefficient, wasteful, or simply ineffective. For example, undertaking a specific CSR initiative simply because everyone else in the industry is, or initiate CSR engagement through green-washing, all of which are not great ways through which to create value in the long-run, and not just for the corporation, but indeed for society at large. In other words, we know that CSR is more likely to fail whenever it is not perceived and treated as a potentially profitable and scalable core business activity.

• A key thing to note is that engagement with CSR implies a truly transformational change for organizations, which poses challenges. It certainly isn’t a Friday afternoon activity, and also, it certainly isn’t simply a CEO Monday morning decision: a recent study we published, with G. Serafeim and Bob Eccles, argues for the emergence of the sustainable organization; a transformation of a traditional organization that involves a fundamental rethink of the organization, it’s purpose and identity and calls for a rethink of key organizational aspects such as corporate governance, incentives, internal transparency and accountability as well as towards the markets, consideration of a company’s the investor base and the time horizon for decision-making and the broader integration of environmental and social issues into strategic decision-making.

• In short, few aspects of the modern organization remain unaffected through a genuine engagement with CSR yet with more and more research we are able to point to specific aspects of organizational designs that are best suited to embed CSR, and to integrate environmental and social issues into strategic decision-making by businesses. For example, on the issue of incentives and rewards, a recent study we completed with G. Serafeim and Shelley Li, at HBS, shows that companies that set more ambitious targets for reduction in carbon emissions and provide monetary incentives to their employees to do so, are better positioned to actually achieve these targets. They undertake, for example, more projects, and they realize more carbon savings without detriment to firm value in the long run.

• Innovation is surely a key mechanism through which CSR may create value by scaling up innovative solutions to big challenges. Because, if we take a step back, and think about the fundamentals, modern businesses are nothing more and nothing less than problem solvers: they discover an unfulfilled need, they come up with a solution (i.e. a product or a service) and then they scale it up profitably, and sometimes, in the long-run by re-inventing themselves as well as the products and services that they produce.

• In the CSR context then, the question becomes how we unleash the innovative potential of business, and how to we build organizations that start seeing the global social and environmental challenges as problems in need of solutions and scale.

• There is already some academic work that looks at the specific mechanisms through which CSR may create value for all stakeholders through innovation. For example, recent academic work has shown that a broader stakeholder orientation leads to an increase in the number of patents as well as an increase in citations per patent, using data from 34 U.S. states between 1984-2006. It is argued by the authors of that study, Caroline Flammer at Ivey Business School and Alexandra Kacpercyk at MIT, that this increase in innovation is due to a more secure work environment that is conducive to the pursuit of innovative activities, as it promotes experimentation and tolerance of failure (i.e. more hits as well as more failures). They also show that a stakeholder orientation fosters innovation by increasing stakeholder satisfaction. We know, for example, that job satisfaction is conducive to creativity and engagement.

• Other potential mechanisms include: a long-term orientation, more time for experimentation and tolerance of failure, superior exposure to the issues through stakeholder engagement, and integrated thinking due to the consideration of both financial as well as non-financial aspects.

• In sum, when we consider the broader issue of CSR engagement by corporations, we need to be clear that there are challenges at multiple levels. In the long-run, for CSR to be able to realize its potential, all of these challenges need to be addressed; some indeed may be addressed through policy, and levelling of the playing field for everyone. A good way of thinking about these challenges is as follows: There are multiple and interconnected levels; it’s a complex problem:

  • Institutional challenges, at the country level (e.g. labor market, capital market, etc)
  • Industry-level challenges, e.g. regulation, perceptions, long-run viability, collaboration
  • Corporate level, corporate governance, leadership, transparency, decision-making
  • Individual level, incentives, mind frames, behaviour

I very much look forward to discussing these issues further with the panel as well as the audience during the course of this very engaging morning here in Brussels.

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