Capitalizing on social responsibility in multinationals

Sustainability and social responsibility have really become the buzzwords for multinational enterprises today. By leveraging communication campaigns, reports, logos and dedicated brands, more and more major corporations are trying to give their brands a “social” spin. And it’s a strategy that’s paying off: investments in social responsibility initiatives can boost the bottom line.

But to reap the rewards of social engagement, companies need to “walk the talk”: all the subsidiaries in the organization must embrace actions and policies that align with corporate social responsibility (CSR). Yet there are a number of obstacles that multinational groups have to face to ensure consistent and systematic compliance throughout the enterprise with CSR policies established at the top. Generally speaking, the performance of subsidiaries is evaluated based entirely on financial indicators. But this gives rise to the danger of a misalignment with respect to CSR goals, because subsidiary managers might be tempted to pay less attention to these goals in an attempt to cut costs or secure new contracts.

The risk is that opportunistic behaviors by individual subsidiaries could profoundly impact the Group as a whole. In fact, final consumers don’t blame scandals on company subsidiaries, but on the general brand, which leads to serious reputational damage. In this context, a peculiar form of interdependence emerges between the behaviors of single subsidiaries. So, to guarantee responsible and consistent compliance with the Group’s CSR policies, it’s essential for top management to introduce effective coordination and control mechanisms.

To identify the best strategy for coordinating CSR initiatives in a multinational group, we developed a theoretical model structured as a three-stage game .

In the first stage, the Group’s top management decides how much to invest to develop a “socially responsible” brand at a global level, with an eye to maximizing business performance. These investments will translate into high-visibility, public initiatives. In stage two, branch managers choose whether or not to behave responsibly from the perspective of maximizing profits for their subsidiary. Irresponsible behavior guarantees better performance, but at the same time increases the risk of damaging the corporate brand if such behavior comes to light. In the third stage, the Group reaps the benefits of the CSR investments, which depend not only on the level of initial investment, but also the (more or less) responsible behavior of the individual subsidiaries and the possible negative fallout for the brand that might result.

To motivate single subsidiaries to behave responsibly, top management could adopt two different strategies, depending on the circumstances: introduce forms of vertical control through ad hoc contracts, directives and monitoring mechanisms; or invest in CSR initiatives above and beyond optimal levels if all subsidiaries spontaneously adopted responsible behavior. Major CSR investments imply a greater opportunity cost for irresponsible behaviors in subsidiaries, which would in turn help thwart such conduct.

A key constraint in pursuing a SCR strategy is the size of the network of subsidiaries. With a small network, subsidiaries tend to behave responsibly under their own initiative; in a middle-sized network the best strategy is for the group to over-invest in CSR. But beyond a certain size, this strategy becomes too costly, so the better approach in this case is to introduce monitoring mechanisms. Finally, in a very extensive network, CSR initiatives will not be profitable due to the high costs of coordination and control.

An alternative to overinvesting in CSR might be to engage mass media, activists and NGOs at a local level. In fact, partnerships and collaboration outside the group means a greater risk of exposing irresponsible behaviors in subsidiaries. In turn, greater risk of discovery tends to prompt subsidiary managers to choose the path of responsible behavior of their own accord.

Another strategy could be to place “altruistic” managers at the head of subsidiaries, people who don’t focus exclusively on maximizing profits when organizing business activities, but instead also take social responsibility into consideration. Putting altruistic managers in charge means incurring extra costs linked to responsible initiatives that they would promote, beyond the CSR policies championed by the group’s top management. Hiring altruistic managers is preferable to overinvesting in CSR when companies had middle-sized networks and when the cost of altruism is not excessive.

Finally, companies need to take into account the impact of national differences on CSR initiatives. In different countries, there may be different risks and sensibilities with respect to socially responsible policies. When there is national heterogeneity among subsidiaries, investing sizeable sums in CSR can be less efficient as a coordination mechanism. Instead, in similar circumstances companies may want to adopt differentiated CSR strategies from country to country.

Investing in CSR initiatives can also boost business profits. In large-scale multinational enterprises, the only way to build a truly “socially responsible” brand at a global level is through consistent behavior by all subsidiaries. For the biggest, internationalized groups in particular, executives can’t expect local managers to spontaneously embrace their CSR policies. This means there is a need for effective coordination and control mechanisms that ensure that the decisions made at the top are enacted in all the subsidiaries, averting opportunistic behaviors.

Contrary to what we might think, a sizeable investment in CSR campaigns by top management is not simply a symbolic initiative: under certain circumstances, similar action could make opportunistic behaviors too risky, thereby motivating subsidiaries to adopt responsible behaviors. Other tactics include bringing on board local activists and NGOs, and recruiting altruistic managers; these could represent effective monitoring mechanisms in companies in certain cases. The bottom line is that top management cannot compartmentalize economic performance and social performance of the company, but must always remember instead that the two are deeply intertwined.