New research by Tuck professor Praveen Kopalle shows that companies can do well by doing good.
In 2014, India became the first nation to mandate that companies spend a portion of their profits on corporate social responsibility (CSR), a range of activities that enhance society and the environment.
Praveen Kopalle is the Signal Companies’ Professor of Management at Tuck. He teaches Analytics; Retail Pricing Strategies and Tactics; and Tuck Integrative Experiential Learning (TuckINTEL).
For Praveen Kopalle, who hails from India and often researches Indian business topics, the Companies Act of 2013 provided a natural setting to answer a question he and many other marketing scholars had wondered about. Specifically, Kopalle wanted to know how CSR spending impacts firms’ profitability. Kopalle, the Signal Companies’ Professor of Management at Tuck, answers this question in a new working paper, and the results show that what’s good for society and the environment can also be good for a company’s bottom line.
Firms all over the world spend money on CSR, but those in developed countries have a head start on their counterparts in developing nations. For example, in 2011, about 50 percent of S&P 500 firms issued separate reports on their CSR activities, and that percentage increased to 86 percent in 2018. In India, by contrast, only about 10 percent of publicly traded companies contributed to CSR in 2012. By 2017, that number had only increased to 11 percent.
India’s CSR law took effect in 2015, and it applied to firms who met a certain threshold for revenue and other metrics. In the following years, its impact on CSR spending became clear. In 2014, Indian companies spent about $1.43 billion on CSR, and by 2019 their spending had grown 85 percent to $2.67 billion.
Against that backdrop, Kopalle and his co-authors (S. Arunachalam of the Rawls College of Business, Hariom Manchiraju of the Indian School of Business, and Rahul Suhag of the Kenan-Flagler Business School) studied data from 2,320 unique firms between the years 2012 and 2017, completing two forms of empirical analysis. The first, a difference-in-differences design, analyzed companies’ CSR spending, advertising, and gross profit margins before and after the passage of the CSR law. The second, a regression discontinuity, looked at firms very close to law’s threshold (on both sides) and compared the differences in their pricing. The theory in this design is that these firms are quite similar, and the law’s CSR requirement is a way to explain contrasts in the firms’ data.
If both techniques are pointing in the same direction, Kopalle said,
then we can establish a casual inference that the law is what’s making the difference.
When the researchers parsed the data, they identified three distinct categories of firms, which they refers to as
Newspender (firms that started spending on CSR after the law was passed),
Prosocial (firms that spent on CSR even before the law was passed), and
Nonspender (firms that didn’t spend on CSR after the law, and chose to explain to the government why they didn’t do so).
Consumers reward socially responsible, profit-maximizing companies and absorb the corresponding price increases without reducing their purchase quantities.
Three main findings emerged from Kopalle’s analysis. First, in the period after the CSR law went into effect, the Newspender group garnered a higher gross margin premium than Nonspender and Prosocial firms; and the gross margin premium for Nonspender firms was lower than that of Prosocial firms. Second, Kopalle found that gross margins for Newspender firms was higher in firms that invested more in advertising.
The Newspenders start saying more about CSR in their ads, Kopalle explained,
and it ends up positively impacting their gross margins. Kopalle’s third finding is that for the Newspender firms, there’s a significant year-to-year price increase after the CSR law took effect. This suggests that
consumers reward socially responsible, profit-maximizing companies and absorb the corresponding price increases without reducing their purchase quantities, Kopalle said.
For Kopalle, the key takeaways are clear:
At the company level, you can do well by doing good, he said.
It’s not a zero-sum game. Furthermore, the paper provides proof that governments in emerging economies can use mandatory CSR laws as an innovative strategy to nudge companies to contribute to social causes. Finally, Kopalle’s analysis shows that CSR laws act as a coordinating mechanism, so firms can use advertising as a tool to bring awareness to consumers.
Between using advertising and price as leverage, Kopalle said,
and having the law as a backup, it gives a cohesive and well-founded story to consumers, so they say it’s worthwhile to pay more for products from these companies.