Corporate social responsibility (CSR) crises can have strong negative effects on organisations.
For instance, in 2010, British Petroleum (BP) was involved in an oil spill off the Gulf of Mexico that is, until today, considered one of the worst environmental disasters in US history. Despite its efforts to contain and rectify the situation, BP was so badly affected by the CSR crisis that its market capitalisation remained at a level that was US$49 billion lower than its pre-oil spill level even one year after the incident.
Following the occurrence of CSR crises, finance leaders often find themselves in the position of having to provide some sort of public response to mitigate the negative effects of such crises.
Two common response strategies
Two common response strategies that they can adopt include the ‘deny’ and ‘rebuild’ strategy. In adopting the ‘deny’ response strategy, the finance leader seeks to prove that no crisis exists or the organisation involved in the crisis does not bear responsibility for the crisis. In contrast, in adopting the ‘rebuild’ strategy, the finance leader accepts responsibility for the crisis and asks stakeholders for forgiveness in the hope of rebuilding the relationship.
Which of these two strategies should a finance leader select? In an upcoming study to be published in Advances in Accounting Behavioral Research, I show that the effectiveness of the ‘deny’ and ‘rebuild’ strategies in alleviating a CSR crisis depends, to a large extent, on an organisation’s prior CSR reputation.
Organisations with good CSR reputation
When an organisation has a good CSR reputation, a manager’s choice of response strategy following a CSR crisis does not influence investors’ investment judgments because the crisis event violates investors’ prior expectations of how an organisation with a good CSR reputation firm should behave in the first place.
In particular, when evaluating a good CSR reputation firm, investors are likely to hold high expectations for how the firm should behave with respect to its CSR activities.
Should a CSR crisis subsequently occur, investors will be confronted with negative news surrounding the firm that is inconsistent with their initial high regard for the firm.
This consequently leads to skepticism about the motives of the organisation regardless of which response strategy it adopts.
However, when an organisation has a bad CSR reputation, investors’ investment judgments are more positively influenced when a manager adopts a ‘deny’ response strategy following a CSR crisis than when he or she adopts a ‘rebuild’ strategy.
In particular, given its bad CSR reputation, investors are likely to hold low expectations for how the firm should behave with respect to its CSR activities.
Should a CSR crisis subsequently occur, investors would then be presented with negative news surrounding the firm that is consistent with their initial low regard for the firm with respect to how it conducts its CSR activities.
Hence, on its own, the crisis event facing the bad CSR reputation firm is unsurprising and not likely to violate the expectations that investors have about how the firm should act or behave.
However, investors are likely to further examine the firm’s response strategy for information that either violates or conforms to their expectations about the behaviour of a firm when it has a bad CSR reputation. In this regard, the ‘rebuild’ response strategy is likely to be inconsistent with investors’ expectations of how a firm with a bad CSR reputation should behave.
Investors are likely to then question the underlying motives of the firm in using the ‘rebuild’ response strategy as a tactic to defend itself from the negative effects of the crisis, triggering feelings of skepticism.
Organisations with bad CSR reputation
In contrast a ‘deny’ response strategy is more likely to conform to investors’ expectations of how a bad CSR reputation would respond to a CSR crisis because they are likely to be perceived as acting according to character.
In this scenario, investors would be less skeptical about the motives of the firm in issuing a response, and be less likely to question the manager’s response.
I demonstrated these effects using an experiment conducted with 158 participants from Amazon’s Mechanical Turk platform. In the experiment, participants were told to assume the role of shareholders assessing the earnings prospects of a target company.
They then received a mock CSR report compiled by an external consultant that either described the target company as having performed well (good CSR reputation condition) or badly (bad CSR reputation condition) on four key CSR dimensions.
Following that, participants received news that the company had been involved in a CSR crisis where a breach of consumer data privacy had occurred. Participants then made initial assessments of the investment attractiveness of the target company.
Next, participants received a news article which reported that the target company had either taken responsibility for the crisis and apologised to stakeholders (rebuild condition) or denied responsibility for the crisis and blamed another company for the data breach (deny condition). After attending to this information, participants again assessed the investment attractiveness of the target company.
Implications for CFOs
The findings from this study have important implications for finance leaders. Organisations are increasingly spending large amounts of resources on CSR activities in order to build up their CSR reputations.
There have also been signs that investors’ investment decisions are increasingly being influenced by a firm’s CSR performance. For example, a recent survey conducted by the management consulting firm McKinsey with CFOs, investment professionals, and CSR professionals found that over 50% of respondents think that an organisation’s environmental, social, and/or governance programs contribute to shareholder value.
While a good CSR reputation is generally regarded as an asset that can protect them from the negative effects in times of a CSR crisis, my finding that an organisation’s CSR reputation can play a role in how investors react to its choice of crisis response strategy is particularly relevant to finance managers, especially as ‘rebuild’ response strategies can often be more expensive to implement than ‘deny’ response strategies.