Effects of Bad Corporate Social Responsibility

Mar 20, 2010Updated 8 months ago
Corporate Social Responsibility Scandals

Corporate social responsibility (CSR) or corporate citizenship entails companies behaving in a socially responsible manner, and dealing with other business parties who do the same. With growing public awareness and demand for socially responsible businesses, it is little wonder that companies of today take corporate social responsibility into account when planning future socially responsible business operations. When a CSR campaign goes awfully wrong and backfires on a company, what are some of the effects?

Bad CSR is Bad Publicity

Companies that appear to be socially responsible by promulgating environment saving or environmental sustainability and, at the same time, being allegedly tangled in an illegal socially irresponsible activity is a tremendous message to send out to the stakeholders including consumers and investors. The effect of such CSR scandals is that credibility and the reputation of the company are undoubtedly badly damaged. There is an old saying that any publicity is good publicity. However, in the world of business, bad publicity is bad publicity, and can cost a company up to millions of dollars, with nothing to speak for goodwill. Corporate social responsibility articles in the news are often quick to fault wrong-doers.

An obvious example of bad publicity from bad corporate social responsibility at play and the effect that bad social responsibility has on a company, is Enron, the Texan energy company that not only brought itself down but also one of the largest accounting firms at that time, Arthur Andersen. Enron was a darling of corporate philanthropy and gave millions in charity donations to charity organizations and won several awards for its corporate social responsibility work, including a climate protection award from the EPA and a corporate conscience award from the Council on Economic Priorities.

In 2001, Enron collapsed under massive debts after it was revealed that Jeffrey Skilling, who was jailed for 24 years, had orchestrated a giant fraud and a massive corporate ethics scandal. Corporate social responsibility articles pounced on Enron and publicized the backlash. As Joel Bakan wrote in The Corporation, “Enron's story suggests, at a minimum, that skepticism about corporate social responsibility is well warranted.” Indeed, Enron never quite recovered from the bad publicity as its supposed socially responsible activities became irrelevant since its very existence proved to be a sham.

Legal Troubles

Naturally, companies are on the wrong side of the law when they engage in socially irresponsible activities. They can pay heavily, literally, as an effect of engaging in such crimes.

The Exxon Valdez tanker incident in Prince William Sound, off the coast of Alaska is one of the most memorable events in corporate social responsibility history. ExxonMobil paid dearly for the Valdez scandal – nearly $4.84 billion in cleanup costs, fines, punitive damages and interest for the flagrant bad CSR act in the Exxon Valdez ethics scandal that dumped 11 million gallons of crude oil into Prince William Sound, damaging wildlife and the fishing industry.

Social Responsibility and Branding

Brand building is a long term effort, but destroying the brand reputation, by a CSR scandal, can happen overnight. Even if a company survives a bad CSR event, it may never be able to shake off the ill effects the bad CSR event has on its brand and reputation. Corporate social responsibility articles of course, will be quick to jump on the bandwagon to promulgate the effect the bad CSR event has on the company.

The CSR Index developed by the Tsinghua University indicates that in the FMCG industry, more than two thirds (68.7%) of the interviewed consumers would refuse to buy or reduce their purchase of products from companies with bad CSR performance. This trend is also reflected in the automotive industry with 62.9% saying the same about companies with bad CSR performance.

As such, there is a correlation between CSR performance in the eyes of consumers and the effect it has on the strength of a company’s brand. It will do little good to the company then, to hurt its hard-built brand with a poor choice in CSR activities.