“Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.  This is a fundamentally subversive doctrine.  If businessmen do have a social responsibility other than making maximum profits for stockholders, how are they to know what it is? Can self-selected private individuals decide what the social interest is?”

However, there are a number of ways in which organizations might be rewarded for CSR initiatives, both ‘carrots’ for success and freedom from ‘sticks’. Freedom from ‘sticks’ includes not being subject to NGO attacks, not having government impositions, not being boycotted from regions or markets, or not losing key employees with different ethical values.  ‘Carrots’ might include good public relations, brand enhancement, access to contracts with CSR requirements, positive relations with NGOs, attracting higher-quality staff at lower rates or preferential access to capital.

Attempts to measure CSR benefits are numerous, and inconclusive.  One authoritative review in 2004 by the United Nations Environment Programme Finance Initiative, working with major global investment banks on 11 studies, concluded that it is too early to prove that CSR leads to superior performance – “The majority of analysts noted difficulties in comparative analysis due to the range of reporting practices for environmental, social and corporate governance risks and opportunities”. But can we measure CSR cost/benefit at a firm level? If we could measure overall CSR cost/benefit we could set an appropriate level in marketing for CSR activities using traditional financial techniques.

Measuring CSR in Marketing

For a senior marketing manager, CSR investment should lead to a demonstrable increase in shareholder value.  Thus, CSR should feature in financial decision-making models and be subject to cost/benefit approaches.  Paradoxically, if CSR cannot fit into financial models, then the senior marketing manager’s firm runs the risk of poor investment decisions leading to under- or over-investment in CSR with the consequent waste of resources that under- or over-investment implies.

One intriguing approach starts with the concept that companies adhering to CSR should reduce earnings volatility.  CSR should make a company more ‘sustainable’. The company should be less vulnerable to actions against it, e.g., attacks from NGOs or government inquiries or bad PR or shareholder dissent.  The company should have fewer staff problems or be able to work in longer term, more stable partnerships.  We know investors favour low profit volatility.  Looking at 1,000 UK companies over 33 years shows that the difference between the top quintile and the lowest quintile of profit stability is a 25% to 30% share price premium for the most stable quintile.  The interesting idea is that perhaps companies invest through CSR in future profit stability in order to keep up their share price.

In real life, one large telecommunications firm tries to value its CSR expenditure in terms of shareholder value.  For instance, locating transmission masts away from schools cost more, but leads to a reduced risk of being affected by possible future public concerns about the safety of schoolchildren near mobile phone masts.  A model gives managers some basic shareholder value estimates using option valuation of CSR initiatives linked to the firm’s share price.  By knowing the value of CSR, the telecommunications firm pursues network provision at higher cost knowing that it probably adds to net shareholder worth and protects brand value.

Measuring Sustainability in Sales

For a senior sales executive, sustainability can seem remote – it’s well beyond this year’s sales targets.  Yet sustainable customer relationships matter.  Sustainable customers are recurring customers who refer others.  Sustainable customers are firm assets.  Firms are trying to link sustainability with the concepts of sales as relationships.  Recent sales and marketing approaches, such as viral marketing, depend on the idea that the relationship of customers with firms is not a simple buy-sell transaction.  A sale is just one interaction between firm and customer within a complex set of interactions where customers are part of a community of people identifying themselves with the purchase of goods or services from a firm.

A sustainable firm can only be one with good services, products and prices that is seen to treat customers fairly, be a valued member of the community and deserve recurring sales.  A fun example of this new approach to sustainable customers is Swatch.  Swatch emerged at a point when wristwatch marketing was getting unsustainable.  Getting ahead meant moving up in quality and price.  Either customers had such a high-quality, long-lasting watch that they needed no more, or the price hikes lost quite a few customers who couldn’t compete in the ‘wallet war’ of expensive fashion statements.  Swatch presented a ‘fashion reduction statement’ – “I have a watch; it’s even Swiss; but I’m not a fool about spending money to show one off”. Naturally, Swatch has many recurring customers who explain their fashion reduction statement to others, and come back for more watches themselves.

“Customers as assets”, is a big concept with big rewards.  Asset provide returns, but they also require care and maintenance.  Asset value needs to be preserved and, where possible, enhanced in order to remain sustainable.  Thus, managing customer relationships has some interesting similarities to managing fish stocks.  Fish stocks are an asset.  Fisherman can bid for quotas, exchange quotas, have overlapping fishing of different stocks over the same ground and need to maintain their fishing assets.  By viewing customers as assets owned by the firm, each salesperson begins to think like a fisherman.  What grounds should I bid for this season? What type of fish should I catch? Should I hand my unproductive customers to others who may have more interest or skill in managing them? What should we expect to deliver from my customer base? If this is going to be a bad year, what are we doing to replenish the stocks in the portfolio?

The starting point is to develop a lifetime valuation formula for the assets.  Valuation of customers is tricky, but certainly not as difficult as many firms claim.  A simple regression analysis will identify the key variables that indicate total returns and likely lifecycle, though more sophisticated statistical techniques are often used.  The valuation formula can then be applied to portfolios of customers.  The resulting value is a target for the fees which the firm expects a salesperson to generate from the portfolio of customers the firm has given him or her to fish.  While the valuation formula will be inaccurate when applied to any specific customer, it can be used in at least three powerful ways – to set overall sustainable customer targets; to improve salespeople’s enduring performance by focusing on the long-term; to inform strategy on pricing and services.

It’s Ethical To Be Financial

In order to promote proportionate CSR and sustainability effort, we need measurement.  Through measurement we can value CSR and sustainability, even in sales and marketing.  Without measurement, CSR decisions are seat-of-the-pants.  A closing question - if CSR benefits can be measured, be quantified and be shown to be superior, then is CSR activity that ‘pays back’ an ethical choice or just a normal business investment decision?

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Professor Michael Mainelli originally undertook aerospace and computing research, followed by seven years as a partner in a large international accountancy practice before a spell as Corporate Development Director of Europe’s largest R&D organisation, the UK’s Defence Evaluation and Research Agency, and becoming a director of Z/Yen (Michael_Mainelli@zyen.com). Michael is Mercers’ School Memorial Professor of Commerce at Gresham College (www.gresham.ac.uk).

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