Freakonomics Radio - 71. Is Good Corporate Citizenship Also Good for the Bottom Line?

Episode Date: April 18, 2012

A new study says that yes, it is -- but try telling that to the United Nations officials who are preaching sustainability practices.

From APM, American Public Media, and WNYC, this is Freakonomics Radio on Marketplace. Here's the host of Marketplace, Kai Risdahl. Time now for a little Freakonomics Radio. It's that moment every couple of weeks where we talk to Stephen Dubner, the co-author of the books and the blog of the same name. It's the hidden side of, wait, what is it? Yes, everything. Dubner, good to have you of the books and the blog of the same name. It's The Hidden Side of, wait, what is it? Yes, everything. Dubner, good to have you back. Hey, Kai, good to be back.

I bring to you today the topic of good citizenship, good corporate citizenship, to be precise. I bet you have heard this kind of thing a million times before. In my particular job, I'm trying to have the biggest impact in terms of reductions in greenhouse gases. And so I get to think of places that have nothing to do with Google's core business, but where we can really have a big impact in reducing greenhouse gases. Okay. Not really. Haven't heard that, but okay.

Well, that's a Google promotional video, the kind of thing that you see more and more these days and where firms talk about their high level of corporate social responsibility or CSR, which I'm guessing you have heard of. Oh, yeah. Sustainability. Come on. That's what we do. There you go.

So I'm here to tell you today, Kai, that some companies who tout their high CSR are not being 100 percent sincere all the time. I am shocked, shocked to find out there's gambling going on. Now, I want you to listen to Georg Kell, who is executive director of the United Nations Global Compact, which promotes good corporate citizenship, particularly sustainability. Very well. Well, if you were to ask me the global 1,000 corporations, you know, how many of them are sincere and seriously about sustainability and long-term value creation? Our own implementation survey and others done by other leading think tanks will probably suggest we are probably at 15%.

No, come on. That's scandalous, 15%. It's not a high number. Yeah. So the way it worked, Kell's group signed up about 7,000 companies. And the UN's list of good corporate behaviors includes not only sustainability but practicing human rights, good human rights, and fighting corruption. Here's Kell again. And it's by and large working, except that roughly half of our participants who joined

actually don't live up to that. So either they lose the focus or they don't have the dedication to continue that pathway. And unfortunately, we have to expel them. Wow, they throw them out. They expel them. Now, they throw them out. They expel them. Now you can get back on. And to be fair, sticking to your CSR promise is a little bit reminds me of sticking to a diet.

You know, even if the spirit is willing, the flesh can be weak. It is a lot of work. So getting a high CSR score means that you have to not only pollute less, but you also have to treat your employees and your customers ethically. You have to set long-term goals that may not necessarily help your quarterly earnings, which is what the street cares about. And, of course, you have to take time to constantly report your progress to places like the U.N. Yeah, but wait a second. What does all that do for your bottom line, right?

Because companies are in business to make money and shareholder value and all that stuff. And does this pay off? It sounds like it would be a bad bet for the bottom line, doesn't it, Kai? Isn't that what you're thinking? That's where I'm going, yes. Unfortunately, you're a little bit off on this. The good news is that- Again, I'm wrong with Stephen Dubner. The good news is there is an upside, apparently. So George Serafim at the Harvard Business School has just finished an analysis of 180 US companies over the course of 20 years to measure the effect, if any, that being a good corporate citizen has on a company's bottom line.

Now, he did this by comparing the financial performance of firms that exhibited high sustainability behavior versus low sustainability firms. We found that the high sustainability group outperforms the low sustainability group in terms of stock market performance. And also, we found that the high sustainability groups outperforms the low sustainability groups in terms of operating performance as well. Whether you look at the return on assets or return on equity, you find strong outperformance. All right. So you spend the money, you make more money. So is the lesson here that all you got to do is hire a chief sustainability person and bang, you're going to do it? No, no, no, no, no more than if I buy a scale, I start to lose weight automatically. Right.

In fact, you have to be careful interpreting the findings of Serafim's study. It may be that being a good corporate citizen is good for business in the long run, or it may be that the kind of company that's more likely to be a good citizen in the first place is also more likely to be a profitable company. Whichever direction the arrow is pointing, however, which we don't really know yet, it does look like at least one truism in the business world is actually true, which is that you really can do well by doing good. There you go. Stephen Dubner, Freakonomics.com is the website. We'll see you in a couple of weeks. true, which is that you really can do well by doing good. There you go. Stephen Dubner, Freakonomics.com is the website. We'll see you in a couple of weeks. Thanks, Kai. Amen. Hey, podcast listeners, we need your help. We are working on an episode about retail etiquette. We want your horror stories as a customer, but we also want to know when you've been treated incredibly well.

So the idea comes from our producer, Susie Lechtenberg, who is originally from Kansas. She's been in New York about a year and a half now, and that's all it took for her to become a total grouch. So, Susie, how do you feel about being treated as a customer? I just don't like it when they're too nice. It just feels phony. So if I say thank you for shopping here today? That's fine. But if you repeat my name when you're making a coffee and you say, how's your day going, Susie?

And then you repeat it again, your coffee's ready, Susie. Thank you very much, Susie. That, to me, they read that in a manual. I hear you. So thank you, Susie, for participating today, Susie. We really appreciate much, Susie. That, to me, they read that in a manual. I hear you. So thank you, Susie, for participating today, Susie. We really appreciate you being here. You're welcome, Stephen. So the misanthropic Susie Lechtenberg, she's probably passed our help, but we want to hear your stories from both sides of the counter.

So go to Freakonomics.com slash radio and click on the talkback box in the right-hand column. And next week on the podcast, could a no-lose lottery be the solution to America's savings problem? And how do you get doctors to wash their hands?