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The Business Case for CSR: Estimating future earnings impacts of CSR projects – J. Bøgh, 2010

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The Business Case for CSR: Estimating future earnings impacts of CSR projects

Abstract While a number of authors have highlighted the many benefits of CSR for communities, business partners, the environment and shareholders in qualitative terms, factual research into quantitative, predictive relationships between CSR performance and corporate financial performance has proven to be more of a challenge. Meanwhile, amid growing interest in the field, practitioners have only scant theoretical guidance available as to how specific CSR projects’ impact on a corporation’s financial performance may be predicted in order to support management decisions. This lack of guidance is unfortunate for three reasons: shareholders’ legitimate expectations for a fair financial evaluation of every company project are not fulfilled; choices between CSR projects may not be made on the most rational basis; and an opportunity to make CSR investment more sustainable by demonstrating its positive financial impact may be missed. In this paper, the author discusses relevant publications and theory as well as a survey of organizations of varying size, and suggests a three-dimensional model for establishing CSR business cases in the corporate environment.

The author Jacques Bøgh is a corporate practitioner in the fields of finance, risk management, internal control, internal audit and CSR. In addition to a Master of Science in Management from HEC Paris, he holds diplomas and qualifications in the areas of accounting, risk management and internal audit, as well as the Certificate in Advanced Studies in CSR of the University of Geneva. With 20 years of professional experience, he has had budgeting and business planning as

a specialty for many years, and has created or supported more than a hundred predictive, NPV-based business cases for new projects, acquisitions, and commercial proposals. He is currently group head of risk management, internal controls, internal audit and tax in a mid-size multinational corporation, where he is also secretary to the group committee governing CSR and ethics matters. His interest in CSR has increased with his involvement in CSR, ethics and governance issues.

Acknowledgements The author wishes to thank Silvana, Julien, Paul and Salvatore for their pointed and insightful feedback in improving the manuscript. Sincere thanks also to Prof. Sandra Waddock and Prof. Michael Hopkins for their helpful contributions to this document. And finally, special thanks to the 52 professionals who dedicated some of their time to participate in the survey.


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Table of contents 1. Introduction ....................................................................................................4 2. Business case: definitions..............................................................................4

2.1. Classical definition .............................................................................4 2.2. Actual use..........................................................................................5

2.2.1. Author’s own experience ............................................................5 2.2.2. The Business Case For Rich Internet Applications.....................5 2.2.3. Microsoft makes the business case for Windows phone ............6 2.2.4. How to Recruit the Best and Brightest........................................6 2.2.5. The Business Case for the Arts ..................................................7

2.3. Summary ...........................................................................................7 3. Business case for CSR: literature ..................................................................7

3.1. Corporate community involvement: Establishing a Business Case ...8 3.2. The Sustainability Advantage: Seven Business Case Benefits of a Triple Bottom Line ........................................................................................8 3.3. Making the Business Case for Sustainability: Linking Social and Environmental Actions to Financial Performance .........................................9 3.4. Corporate Social Responsibility: is there a business case?.............10 3.5. The business case for corporate social responsibility: A company-level measurement approach for CSR .......................................................11 3.6. The relationship between corporate social responsibility and shareholder value: an empirical test of the risk management hypothesis ..11 3.7. Summary .........................................................................................12

4. The need for predictive business cases for CSR projects ...........................13 4.1. Agency theory..................................................................................13 4.2. Stakeholder theory...........................................................................14

5. Survey: practical approaches within organisations ......................................14 5.1. Description of the questionnaire ......................................................15

5.1.1. Form and time span..................................................................15 5.1.2. Questions asked.......................................................................15 5.1.3. Population demographics and statistical reliability....................15 5.1.4. Correlations ..............................................................................15

5.2. Key results.......................................................................................15 5.2.1. Frequency of CSR proposal review..........................................15 5.2.2. Responsibility for reviewing CSR proposals .............................16 5.2.3. Written support for CSR decisions............................................17 5.2.4. Consistency and quality of CSR proposal justifications ............17

5.3. Segmentations by size.....................................................................18 5.3.1. CSR and public relations ..........................................................18 5.3.2. Board involvement....................................................................20 5.3.3. CSR project justifications..........................................................20

5.4. Main conclusions .............................................................................21 6. A three-dimensional CSR business case model ..........................................21

6.1. Dimension 1: Type of financial benefit .............................................22 6.1.1. Component: Cost reductions ....................................................22 6.1.2. Component: Revenue increase ................................................22 6.1.3. Component: Risk mitigation......................................................23

6.2. Dimension 2: Specific or generic benefit calculation........................23


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6.2.1. Component: Specific benefit calculation...................................24 6.2.2. Component: Generic benefit calculation...................................24

6.3. Dimension 3: Type of cash flow analysis .........................................24 6.3.1. Component: Discounted cash flow ...........................................24 6.3.2. Component: Simple / no cash flow ...........................................25

6.4. The CSR business case model .......................................................25 6.4.1. Dimensions, components, and elements..................................25 6.4.2. Quality of a business case........................................................26 6.4.3. Relevance beyond CSR ...........................................................26

7. Conclusion ...................................................................................................26 8. References and bibliography .......................................................................28

8.1. References ......................................................................................28 8.2. Bibliography.....................................................................................29

9. Appendix......................................................................................................31 9.1. Survey questions .............................................................................31


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1. Introduction Corporate Social Responsibility, or CSR1, which is by essence a corporate activity, inevitably brings up the issue of the motivations of the organisations practicing it. In principle CSR is about “doing good”, and thus intertwined with notions of altruism and benevolence, which run contrary to the profit motive. Even so, while CSR certainly benefits the organisation practicing it in addition to the various stakeholders, CSR is also usually associated with outlays, sometimes significant. Ignoring CSR expenditure could mean endangering the organisation’s survival, and therefore a review of anticipated CSR expenditure may be considered a core responsibility of management. Conversely, reviewing CSR benefits in relation to such expenditure would yield a more complete picture and show whether certain CSR projects actually improve the organisation’s bottom line. Such a review is commonly referred to as a “business case”. The objective of this paper is to explore and model this “business case” – specific to the organisation, predictive, and potentially encompassing future cash flows discounted to present value. Such a business case has the potential to protect the interests of shareholders and investors, but also to prove that certain CSR undertakings are profitable, and thus make a CSR engagement both more selective and more sustainable. We will review accepted meanings of the expression “business case”, examine the literature about “the business case for CSR”, and assess whether both agency and stakeholder theories, although they view the corporation from very different perspectives, support the use of business cases to assess CSR opportunities. We will analyse the practice of CSR project review through a survey of 52 organisations, looking into responsibilities, methodologies, attitudes, and differentiating organisational attributes. And finally we will propose a three-dimensional model for CSR business cases with a view to providing practitioners with guidance as to the elements of adequate and relevant decision support.

2. Business case: definitions Even a brief consultation of the various papers referring to “business cases” shows that there may be several meanings to the word.

2.1. Classical definition

In the financial area, the common acceptance of the expression is centred on investment decisions, i.e. the evaluation of marginal costs and benefits of a potential business decision: “A business case frequently involves assessing the value of an investment in terms of its potential benefits and the resources

1 In this paper we have considered that comments in literature about CSR and other similar

concepts, such as “sustainability”, “sustainable development”, “corporate social performance” and the like, are close enough to be considered part of a single theoretical body when pertaining to discussions about “the business case”. Conversely, instead of providing survey participants with a preset definition of “CSR”, certain survey questions were designed specifically to gather information about the meaning given to CSR in the relevant organizations, with a view to avoiding misinterpretations and enhancing analysis of the results.


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required to set it up and to sustain it” (Remenyi and Remenyi, 2009, p.10). In a corporate setting, typical components of a business case for investment decisions include:

• A written, narrative description (often presented as slides) • Spreadsheet calculations assessing the value of revenue and cost

changes triggered by the proposed decision. Such business cases are usually prepared by the manager(s) proposing the investment, with the support of the finance department so as to ensure accuracy and consistency, but also in some cases for the finance department to serve as “sparring partner” for the manager(s). The final investment decision is often made by a committee including several senior managers who together have the power, delegated by the Board of Directors, to approve investments and new ventures up to a given amount.

2.2. Actual use

While most usual definitions of the words “business case” evolve around similar notions of structured arguments and cost-benefit assessments to trigger a commitment of resources, the actual use of the expression varies, as the following examples will illustrate. The following references have been selected mainly by performing searches of documents and websites containing the word “business case”; the search results were then selected so as to represent a varied sample of the uses of the expression “business case”.

2.2.1. Author’s own experience

The author has at various points in his career been responsible for business cases and business planning. For example, for a few years, he had the responsibility for the financial review of, and support for, business cases regarding potential commercial proposals to existing customers or prospects of an international telecommunications company. All business cases had to include the following:

• Narrative including key points of the proposal and strategic / commercial rationale, presented on a few slides

• Financial modelling including forecast marginal cost and sales as well as net present value.

These proposals were reviewed once a week by a committee consisting of several senior vice presidents of the organization. While the finance function did not officially have veto power, it was always possible to point out that the financial cost/benefit analysis would not show a profitable business proposition, in which case the proposal was rarely accepted. In the author’s view this approach was highly consistent with the orthodox definition of a business case.

2.2.2. The Business Case For Rich Internet Applications

This paper represents the classical understanding of the business case approach. Rogowski (2007) starts with narrative and opinions gathered from surveys before featuring ROI (Return On Investment) models including concrete cost / benefit analysis (of Rich Internet Applications, or “RIA”s, in this


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case) using monetary metrics. The following table shows one of these models.

2.2.3. Microsoft makes the business case for Windows phone

In the introduction to this blog article, Foley (2010) explains that “At the TechEd conference on June 7, however, officials got more granular about some of the other functionality that the company believes will prove that Microsoft hasn’t abandoned its core enterprise base with the new phones that were designed to be consumer-centric.” What follows is indeed a list of details of new features described by the company, as well as some pricing information. This blog article is thus implicitly calling the act of listing features “making the business case”, even though benefits are only mentioned in technical terms and no cost / benefit analysis is made at all.

2.2.4. How to Recruit the Best and Brightest

At the start of an interview about diversity in recruitment, Hewlett (2009) states that “[…] making the business case for why this has to be done now, even in the midst of the global recession, actually needs a pretty complicated


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argument. To go down the list and to spell out why it is an urgent priority now, I think the first thing I would stress is the tremendous demographic shifts out there in the world.” Hewlett moves on to give three arguments in favour of diversity:

• Only 17% of people in the world with bachelor degrees are white men • Research shows that diverse teams make better decisions and are

more innovative • 83% of consumer decisions are made by women.

While Hewlett supports her argument with some numerical information, the cost of the suggested recruitment strategies is not mentioned at all, while the benefits are only explained in general terms. Again there is no cost/benefit analysis.

2.2.5. The Business Case for the Arts

This editorial (popcitymedia.com, 2009) was written by certain organizations as part of the Pittsburgh is Art campaign. Its purpose is to promote art, and in particular the art infrastructure and economy, in Pittsburgh through a series of arguments. These arguments include, for instance:

• “The arts allow us to imagine a new way to live and envision the world” • “Pittsburgh's rich cultural legacy holds significant international value” • “The non-profit arts and culture industry in Allegheny County generates

$[US]341 million in economic activity — $230.7 million by the organizations themselves and an additional $110.7 million in event related spending by audiences”

• “The industry supports over 10,192 full-time equivalent jobs and $33.7 million in local and state government tax revenues”

Interestingly, while monetary information is presented as something positive, even as part of the benefits, it is mainly just information about resource consumption. In reality we learn that the art industry generates 341 MUSD of spending per year, uses more than 10,000 people, and that in monetary terms only 33.7 MUSD are generated in revenues as a consequence. Of course the benefits of the arts are in reality extremely precious, but the point is again just that the word “business case” is not used to introduce an actual cost/benefit calculation, even if monetary information is provided.

2.3. Summary

A review of the ways in which the expression “business case” is used in various settings shows similarities and differences. A business case is always perceived to be a set of arguments in favour of something. Yet the set of arguments may be just narrative and general, or supported by detailed financial and other analytical elements. The quality of the arguments may also vary; and finally, the “something” favoured by a business case may be a concept, a product, an action, past, present, or future. We will now examine whether when combined with the CSR concept the spectrum is similarly broad.

3. Business case for CSR: literature We have thus illustrated that the “business case” concept is used in several ways, which are gradually more or less close to the most common definition,


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i.e. a monetary cost/benefit analysis supported by narrative arguments. In some cases analytical tools such as ROI (Return On Investment) templates or models are supporting the “business case”; in other cases, more or less adequate narrative arguments are either not supported by monetary information at all, or are accompanied with inadequate monetary indicators which for instance reflect only resource consumption without evidencing any benefits, or vice-versa. When “the business case for CSR” or similar wording is used, it seems that what is referred to is usually of the less structured kind. Reference to a business case in the orthodox definition is not found very frequently (although it does exist). The most frequent understanding seems to be that general reasoning based on evidence which is only sometimes not just anecdotic, often derived from past instances throughout a number of organisations and seemingly only exceptionally from projections specific to one particular organisation or instance, proves the case for CSR. The following paragraphs shall critically review a few representative examples of references to “The business case for CSR” in chronological order.

3.1. Corporate community involvement: Establishing a Business Case

This study (The Centre for Corporate Public Affairs and The Business Council of Australia, 2001) of 115 large Australian companies’ approach to Corporate Community Involvement (“CCI”) is presented in book form. It is not so much suggesting approaches as reporting on what businesses actually do. At the time the book was published (2000), it seems that a number of businesses believed that there was indeed business rationale for such CSR-related expenditure, but there is no mention in the book of specific methods for predictive business cases. Rather, under a subsection “Rationale for Corporate Community Involvement”, three main reasons for CCI are identified: commercial interest, public good, and enlightened self-interest. Companies, the study indicates, hope to benefit from CCI in four main ways: enhanced corporate reputation; improved relationships within the community; increased employee morale, team work and retention; and a changed culture that indicates a long term corporate direction. Likewise, the concluding chapter “Assessing the Benefits” is in reality not describing benefits to companies from their CCI, but rather benefits to the community itself, admittedly with some concern about the efficiency of the expense incurred (“bang for the buck”). It can thus be concluded that this particular opus only considers the business case in qualitative terms.

3.2. The Sustainability Advantage: Seven Business Case Benefits of a Triple Bottom Line

This book (Willard, 2002), written by an author specializing in company seminars, is the most specific regarding the meaning of the words “business case”. Indeed the seven chapters of the book reflect one bottom-line benefit each, and rather detailed instructions are provided – including spreadsheet templates – for the calculation of cost and revenue changes linked to each one of these benefits. Even risk reduction is thus covered.


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While Willard does address the business case from the predictive, business-relevant angle, his book leaves some questions open. Indeed, based on the author’s own experience, the reasoning to build up the business case numbers may be seen to be based on a somewhat one-sided approach. For instance,

• The only cost envisaged is for training. This is not realistic – reducing e.g. certain chemicals in manufacturing calls for significant investment other than just training

• Cost reductions are derived in a very “top-down” fashion (although suggestions are provided to achieve more detailed numbers), e.g.: REDUCED MANUFACTURING EXPENSES

Simple, Macro-level Calculation

Hardware revenue $22'000'000'000 (Assumption: Hardware percent of total revenue) 50%

Hardware costs $6'600'000'000 (Assumption: Costs as a percent of hardware revenue) 30%

Sustainability savings in manufacturing costs $330'000'000

(Assumption: Percent of hardware costs saved) 5%

- Savings reinvested in other environmental projects $165'000'000

(Assumption: Percent of savings reinvested) 50%

---------- -------------------------------------------------------------------------------- ---------------------------

Annual benefit in MANUFACTURING costs $165'000'000 • Some suggested benefits which are usually notoriously difficult to

measure are supported by rather qualitative argumentation and may be seen to be oversimplified, e.g.: Increased Productivity of Individual Employees

Total number of employees 120'000

x Percent who will be energized by the company's sustainability initiatives 20%

x Percent increased productivity from their increased commitment 25%

x Average employee's annual salary $60'000

-------------------------------------------------------------------------------------------------- ---------------------

Benefit of increased productivity from INDIVIDUALS $360'000'000 Willard’s work is in a way pioneering – he is one of the very few who have described a methodology for company specific, discounted cash flow based business cases for CSR. Unfortunately though, some of the actual calculations he suggests may not meet the standards for plausibility and completeness against which business cases are actually reviewed in established organisations.

3.3. Making the Business Case for Sustainability: Linking Social and Environmental Actions to Financial Performance

Contrasting with Willard, Epstein and Roy (2003) have taken a scientific approach by reviewing sustainability reports of a selection of companies for evidence of linking social and environmental actions to financial performance. They propose a hierarchy of four “levels of integration”:

• Level 1: descriptive information not linked to financial performance • Level 2: quantified information not linked to financial performance


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• Level 3: monetised information on expenditure, partially linked to financial performance

• Level 4: monetised information on the benefits of expenditure (i.e. measures of benefits in addition to measures of costs), fully linked to financial performance.

Level 4 integration could probably be seen to indicate at least the availability of data allowing companies to build predictive business cases. Interestingly the authors find that level 4 integration is most often found in relation to environmental issues, although the benefits reported are usually limited only to direct cost reductions (e.g. as in the case of recycling) rather than more indirect effects. The authors also propose a framework – “Drivers of sustainability and financial performance” – which, by linking a company’s sustainability actions to stakeholder benefits and then financial performance, and assuming a given causality – is reminiscent of Kaplan and Norton’s Balanced Scorecard2 (1992). In the end, the Epstein and Roy paper describes instances where data should be available to make a financials-based predictive business case, and also provides an interesting four-level “integration” classification.

3.4. Corporate Social Responsibility: is there a business case?

In this classic example of literature on “the business case for CSR”, Hopkins and Cowe (2003) list the many benefits of CSR in great detail, among which:

• Increased investment from socially responsible investors • Increased employee motivation and productivity • Brand equity / increased sales • Risk reduction re. external stakeholders.

Regarding quantitative evidence for a link between social and financial performance, the literature existing at the time is reviewed comprehensively. Such literature, unfortunately, is entirely based on ex post statistical analysis, and thus fails to provide managers with a framework with which to build predictive, NPV-based business cases. Nonetheless the tour d’horizon highlights certain interesting facts, mainly that

• Several studies fail to show a link between CSR and financial performance - but this would mean that CSR is at least not penalising companies

• Studies may be hampered by biases and suspect evidence (Zadek and Chapman, 1998; Chen, 2001).

2 The initial Balanced Scorecard approach was based on reporting measures within four

areas – Learning & Growth, Internal Processes, Financial, Customer – which were to be used by management to assess corporate performance with regards to the execution of company strategy. The four areas were empirically deemed to be linked by a causal relationship: better Learning & Growth performance leading to better Internal Processes and so on. In some respects the Balanced Scorecard may be seen as an attempt at considering other stakeholders than just shareholders in defining the success of a company.


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3.5. The business case for corporate social responsibility: A company-level measurement approach for CSR

In several ways this article by Weber (2007) may be seen as an academically more robust pendant to Willard’s work (2002). In an attempt to create a company-specific business case template for CSR, Weber adds KPIs and even discounted cash flows (under “Monetary Value Added”) to the usual arsenal of more qualitative argumentation. The following is Weber’s attempt at applying the “Monetary Value Added” approach to a specific research case:

While it is of course regrettable that only very little data was available for analysis in this particular case study, leading to a table containing many zero values, there is significant merit to having included classic financial analysis in a CSR assessment framework.

3.6. The relationship between corporate social responsibility and shareholder value: an empirical test of the risk management hypothesis

This paper (Godfrey P. C., Merrill C. B., Hansen J. M., 2008) is examining the gain to shareholders of a company’s CSR activities from the specific angle of risk management and reduction, i.e. preservation rather than generation of “Corporate Financial Performance”. Building on Mattingly and Berman ‘s (2006) distinction between CSR activities that target the firm’s primary stakeholders (“technical CSR”), and activities that target the firm’s secondary stakeholders (“institutional CSR”), as well as the notion that technical CSR is more reflective of power relations and necessity, the authors uncover strong statistical evidence that institutional CSR has an insurance-like effect on stock


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market value in the aftermath of negative legal or regulatory action, while technical CSR does not. In other words, it would appear that the more altruistic versions of CSR generate a form of goodwill which reduces adverse stock market reactions to law suits and regulatory sanctions. The article is thus extremely relevant as to whether and how CSR has a valuable risk reduction effect. Nonetheless, it does not provide specific guidance to the corporate practitioner seeking to build such findings into a predictive, company-specific, NPV-based business case.

3.7. Summary

There have been many publications, scientific or not in nature, commenting on “the business case for CSR”. A few of them have been reviewed above and may be summarized in the following table: Business case for CSRReferences in literature

Corporate community

involvement :

Establishing a

Business Case

The Sustainability

Advantage: Seven

Business Case

Benefits of a Triple

Bottom Line

Making the Business

Case for

Sustainability: Linking

Social and

Environmental Actions

to Financial

Performance’

Corporate Social

Responsibility: is there

a business case?

The business case for

corporate social

responsibility: A

company-level

measurement

approach for CSR

The relationship

between corporate

social responsibility

and shareholder

value: an empirical

test of the risk

management

hypothesisAuthors Centre for Corporate

Public Affairs

Willard B. Epstein M. J. and Roy

M. J.

Hopkins M. and Cowe

R.

Weber M. Godfrey P. C., Merrill

C. B., Hansen J. M.

Date published 2000 2002 2003 2003 2007 2008

Type of publication Book Book Article Booklet Article Article

Description Based a survey of

Australian

businesses, practice

and benefits of community

involvement are

examined.

Seven examples of

financial benefits of

CSR activities

Review of

sustainability reports

for evidence of linking

social and environmental actions

to financial

performance

Explore evidence as

to whether CSR

makes financial sense

Attempt at a company-

specific business case

for CSR

Analysis of possible

links between CSR

activities and risk

reduction

Business case:

operational description

None Arguments, and

spreadsheet

calculations involving

cost and revenue,

leading to a Net

Present Value

Four levels - level 3 =

partial link of

expenditure to

financial performance,

level 4 = full link of

expenditure to

financial performance

Only qualitative

descriptions of costs

and benefits to

various stakeholders

Includes monetary

value added, with

mathematical formula,

and more qualitative

metrics

None

Business case:

conceptual description

Vague ("techniques

for assessing

business benefits")

"Proof of quantifiable

financial benefits"

Somewhat similar to

Balanced Scorecard

(Kaplan and Norton) -

strategy > actions >

stakeholder benefits >

shareholder value

Causal, quantitative

link between CSR

actions and financial

indicators

Mix of discounted

cash flow, KPIs, and

purely qualitative

benefits

Whether shareholders

gain upon CSR

expenditure

Business case - benefits envisaged

- enhanced corporate reputation

- improved

relationships with the

community

- increased employee

morale, team work

and retention

- changed culture that

indicates long term corporate direction.

- Talent attraction- Talent retention

- Employee

productivity

- Reduced

manufacturing costs

- Reduced

commercial site costs

- Increased revenue

- Reduced risk

- Reduce costs- Create options

- Gain customers

[increase revenue?]

- Reduce risk

- Increased investment from

socially responsible

investors

- Increased employee

motivation and

productivity

- Brand equity /

increased sales

- Risk reduction re. external stakeholders

- Sales increase- Grants and

subsidies

- Cost savings

- Reduction of taxes &

duties

- Risk reduction

- Employee attraction,

motivation and

retention

- Financial performance

- Risk reduction

- Better share price

Link between expenditure

and financial benefit

mentioned?

Yes Yes Yes Yes Yes Yes

Link between expenditure

and risk reduction mentioned?

Hardly Yes Yes Yes Yes Yes

Discounted Cash Flow

analysis mentioned?

No Yes No No Yes Yes

Business case:

operational guidance

provided for use by

managers

No Yes No No Yes No

It is striking that very few publications actually provide the corporate practitioner with specific guidance for the creation of predictive, company-


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specific, NPV-based business cases. Publications could be classified according to three underlying categories:

• Category 1: qualitative argumentation This category would encompass publications which will describe the perceived benefits to the organisation of CSR, but without numerical evidence.

• Category 2: ex-post quantitative argumentation Publications in this category would aim to show a positive link between past CSR activity and past financial performance.

• Category 3: predictive quantitative framework Publications in this category, while not proving any link between CSR and financial performance, would propose or examine a framework for establishing predictive financial business cases for CSR actions, based on an organisation’s specific situation.

Among the publications reviewed in the course of our research, the most typical appear to be a mix of categories 1 and 2 – where qualitative argumentation is complemented with more or less specific reference to research of the category 2 type. Conversely, a number of scientific articles are clearly in category 2. Category 3 publications were empirically found to be rare, whether of a scientific nature (Weber, 2007) or not (Willard, 2002).

4. The need for predictive business cases for CSR projects

Meanwhile CSR is by definition a corporate endeavour, and is thus part of a system in which shareholder value– i.e. profit generation, or the perspective of it - is a condition for investor confidence and thus existence of the company. Therefore, it may be expected that CSR project proposals would be subjected to the same discipline as any proposed expenditure, i.e. budgetary discussion and/or review of a business case showing costs and benefits and related narrative. A number of theories may be considered to describe the circumstances and consequences of a situation whereby CSR endeavours were to be excluded from preliminary cost/benefit analysis. What follows is an analysis of just two quite different theories in this respect.

4.1. Agency theory

Agency theory (see for instance Eisenhardt, 1989) explores the issues inherent to the relationship between a Principal and an Agent, the Agent having e.g. been hired to perform work for the Principal. In the corporate setting, the Principal could be the shareholder and the Agent, management. The theory states that the Agent and the Principal may have a. different goals b. different attitudes to risk. One classic proposal to mitigate these issues has been to align the Agent to the Principal’s aims by offering the right incentives to the Agent. If we posit that the main aim of the shareholder, as Principal, is to maximise his return on investment, then the incentive structure must not only reward past performance, but there should also be a system ensuring that present decisions by the Agent fulfil the same aim. In the corporate setting, the common way of testing decisions against the future return on investment criterion is the business case. Hence it follows that a choice by


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the Agent (management) not to apply the business case test to a proposal to use resources on a CSR project would be a. indicative of differing goals between management and the shareholder b. lead to a suboptimal outcome for the Principal. An obvious criticism of this idea is that the shareholder may actually wish to have the company expend resources on CSR projects without foreseeing a positive return on investment – as an example, one could imagine that philanthropic donations for the conservation of traditional textile crafts could, under certain circumstances, be difficult to link to a positive return on investment3. But indeed another aspect of agency theory concerns the difficulty for the Principal to get adequate information on the Agent’s actions, and it is arguably important, especially in relation to projects without a return on investment, for management at least to document in a business case the amount of resources required for such projects. Any other approach would mean uncontrolled use of resources, which could threaten the survival of the corporation itself.

4.2. Stakeholder theory

The stakeholder theory formulated by Freeman (1984) essentially holds that "all persons or groups with legitimate interests participating in an enterprise do so to obtain benefits, and there is no prima facie priority of one set of interests and benefits over another" (Donaldson and Preston, 1995). This idea, which may now be seen to be an important cornerstone of CSR, also encompasses the notion that “Corporations shall be managed in the interests of its stakeholders” (Freeman, cited in Donaldson and Werhane, 1993). Freeman does not deny the responsibility of the company towards its owners, but suggests that other stakeholders should have increased rights regarding the company’s actions. Yet the shareholders’ right to be informed about actual and projected use of resources and concurrent financial benefit does not appear to be denied under the stakeholder theory, since Freeman (as cited in cited in Donaldson and Werhane, 1993) suggests, for instance through “The Principle of Governance”, to protect the interests of each stakeholder without putting any group, including owners, at a disadvantage. But if such rights are upheld, it follows in our view that the business case approach to assessing proposed CSR relevant expenditure is legitimate under the stakeholder theory. Furthermore, the financial health and thus survival of the company is not only in the shareholder’s interest, but probably in many, or most, other stakeholders’ interest as well.

5. Survey: practical approaches within organisations As predictive business cases for assessing CSR projects are an important tool for rational resource allocation, we have conducted a survey to examine how a number of organisations actually assess CSR projects in practice.

3 The author knows of a case where the main shareholder of a midsize corporation had

exactly such interests – but they were financed directly out of the main shareholder’s private funds instead of through company means.


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5.1. Description of the questionnaire

5.1.1. Form and time span

The survey was conducted online between 12 May and 13 July 2010.

5.1.2. Questions asked

The questions asked in the survey are included in appendix 10.1.

5.1.3. Population demographics and statistical reliability

The survey was conducted among professionals, working for the organisations whose characteristics they have reflected in the survey, belonging to various groups (such as alumni associations) of which the author is a member. While the sample of organisations thus assembled cannot be said to be representative of any particular group of organisations, a number of questions within the survey were designed to be able to analyse responses in view of the organisations’ characteristics or attitudes towards CSR in general. Also, the survey was answered by a very diverse sample of organisations, large and small, multinational or not, and based in Europe, the USA, and India. A typical indication of this diversity is that 26 out of 52 respondents indicated that they were answering for organisations with more than 2’000 employees.

5.1.4. Correlations

We have sought to identify linkages between the responses to all possible question pairs by performing an integral correlation analysis. Due to the relatively modest size of our sample, we have only considered correlations with an absolute value above 0.3 (i.e. above 0.3 or below -0.3), and we have avoided to comment on correlations which appeared to be common consequences of a single, different root cause. Admittedly the causality in such instances rests on our hypotheses and interpretations, since the survey was not designed to identify causal relationships.

5.2. Key results

5.2.1. Frequency of CSR proposal review

Respondents were asked: “Does the management or the Board of Directors of your organisation sometimes decide whether to implement - or not - particular CSR actions or projects?”.

Response Response Response Response

PercentPercentPercentPercent


CountCountCountCount

44.0% 22

14.0% 7

14.0% 7

18.0% 9

10.0% 5

50505050

2222

Yes, but less than once a year

Answer OptionsAnswer OptionsAnswer OptionsAnswer Options

Don't know

Yes, approximately once a year

skipped questionskipped questionskipped questionskipped question

Does the management or the Board of Directors of your organisation sometimes decide Does the management or the Board of Directors of your organisation sometimes decide Does the management or the Board of Directors of your organisation sometimes decide Does the management or the Board of Directors of your organisation sometimes decide

whether to implement - or not - particular CSR actions or projects?whether to implement - or not - particular CSR actions or projects?whether to implement - or not - particular CSR actions or projects?whether to implement - or not - particular CSR actions or projects?

No, never (has never happened so far)

Yes, several times a year

answered questionanswered questionanswered questionanswered question


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The question was intended to be phrased so as to make it clear that a review, with a possible negative outcome, was being performed. 58% of respondents indicated that reviews were taking place at least once a year, while 18% indicated that reviews were never taking place. Interestingly, the replies to this question were significantly correlated with the evaluation of the statement: “CSR is a central part of company strategy”. The more positive the reply to the latter, the more likely an organisation was to perform regular reviews:

CSR central to strategy?

Frequency of CSR proposal review? Yes / rather yes No / Rather no All replies

Yes, several times a year 59% 25% 42%

Yes, approximately once a year 11% 0% 13%

Yes, but less than once a year 11% 17% 13%

Don't know 15% 0% 10%

No, never (has never happened so far) 4% 58% 17%

(blank) 0% 0% 4%

Grand Total 100% 100% 100%

5.2.2. Responsibility for reviewing CSR proposals

The responsibility for reviewing CSR proposals was investigated through the question “Who makes "go/no go" decisions regarding CSR actions or projects in your organisation?”, with multiple answers possible.





42.9% 15

82.9% 29

22.9% 8

0.0% 0

8.6% 3

35353535

17171717

Middle management


Other (please specify)

Top management (CEO, CFO...)


Who makes "go/no go" decisions regarding CSR actions or projects in your organisation? Who makes "go/no go" decisions regarding CSR actions or projects in your organisation? Who makes "go/no go" decisions regarding CSR actions or projects in your organisation? Who makes "go/no go" decisions regarding CSR actions or projects in your organisation?

(multiple answers possible)(multiple answers possible)(multiple answers possible)(multiple answers possible)

Don't know

The Board of Directors


Among the answers provided, “top management” was the most frequent with 82.9%, showing that CSR decisions are usually not left to middle management. Surprisingly perhaps, top management involvement was not matched with involvement by the finance department, which was reported in only 45.7% of cases:





45.7% 16

34.3% 12

20.0% 7

35353535

17171717skipped questionskipped questionskipped questionskipped question

No

Is the Finance department involved in preparing CSR decisions?Is the Finance department involved in preparing CSR decisions?Is the Finance department involved in preparing CSR decisions?Is the Finance department involved in preparing CSR decisions?


Yes

Don't know / not applicable



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5.2.3. Written support for CSR decisions

Respondents were asked how CSR decisions were supported in their organisations:





25.7% 9

22.9% 8

22.9% 8

17.1% 6

25.7% 9

14.3% 5

8.6% 3

25.7% 9

11.4% 4

3

35353535

17171717

Written justification, with numerical / financial justification - but not specific to the

company (e.g. "studies show that ISO 14001 certified companies outperform the

stockmarket by 1%")

Written justification involving benefits in terms of risk reduction


Written justification, with specific numerical forecasts of the impact on the company

(costs and revenues)

Written justification without numerical / financial tables

Written justification with Discounted Cash Flows (DCF) or Net Present Value (NPV)


How does your organisation make CSR decisions? (multiple answers possible)How does your organisation make CSR decisions? (multiple answers possible)How does your organisation make CSR decisions? (multiple answers possible)How does your organisation make CSR decisions? (multiple answers possible)


(costs only or revenues only)

Don't know

No written justification


(costs and cost savings)

answered questionanswered questionanswered questionanswered questionComments

Among the salient findings, it should be noted that fully 25.7% of respondents’ organisations required no written justification for CSR actions. It could be theorised that such organisations should be very small and thus not require complex approval circuits, but there was no strong correlation to size, geographical extension or other characteristics. We also noted that only 8.6% of respondents indicated that their organisation would use discounted cash flows or net present value in making CSR decisions. Not surprisingly, the three organisations in question were large, mature, multinational organisations in the consultancy, air transport and telecommunication sectors.

5.2.4. Consistency and quality of CSR proposal justifications

Two questions were aimed at assessing the consistency and quality of CSR proposal justifications:





24.2% 8

42.4% 14

24.2% 8

6.1% 2

3.0% 1

33333333

19191919

Not very consistent


No opinion

Quite consistent


How consistent are CSR action / project justifications at your organisation?How consistent are CSR action / project justifications at your organisation?How consistent are CSR action / project justifications at your organisation?How consistent are CSR action / project justifications at your organisation?

They vary widely

Very consistent (there is a recurrent process)



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20.6% 7

41.2% 14

32.4% 11

0.0% 0

0.0% 0

5.9% 2

34343434

18181818

Average



Very bad

Good


What is the average quality of CSR action / project justifications?What is the average quality of CSR action / project justifications?What is the average quality of CSR action / project justifications?What is the average quality of CSR action / project justifications?

Bad

Very good

No opinion

As could probably be expected, the answers to these two questions were strongly correlated. More interestingly though, they were both also strongly correlated with risk assessment activities. The organisations with the most structured approach to risk assessment activities would have CSR project justifications of a significantly better quality, as is illustrated by the following table:

Risk assessment activ ities in functio n o f qua lity o f CSR justifica tionsRisk assessment activ ities in functio n o f qua lity o f CSR justifica tionsRisk assessment activ ities in functio n o f qua lity o f CSR justifica tionsRisk assessment activ ities in functio n o f qua lity o f CSR justifica tions

0

0.5

1

1.5

2

2.5

3

There is a legal

obligation to perform

risk assessments

The company has a

formalised approach

to risk assessment

The company

performs risk

assessment at the

enterprise level (as

opposed to function

or department

specific only)

The company

performs risk

assessments at least

once a year

The company ranks

risks according to

importance

The company ranks

risks according to

probability and

impact

The company ranks

risks according to

probability and

monetary impact

Risk assessments

are discussed by the

Board of Directors

Very good Good Average

In this graph, the blue bars are indicative of “Very good” CSR justification quality, the red ones reflect a “Good” rating and the yellow ones an “Average” rating. The fact that the blue bars are smaller indicates a better rating across all the risk assessment questions when respondents rated CSR justifications to be “very good”.

5.3. Segmentations by size

Due to the relatively modest size of the total sample used for the analysis, only one dimension has stood out as a truly important differentiator in organisations’ approach towards CSR and CSR project justification: size. We have divided our sample of 52 organisations up according to whether respondents indicated that their organisations’ total worldwide number of employees exceeded 2’000 (hereafter referred to as “large” organisations) or not (“smaller” organisations).

5.3.1. CSR and public relations

We found that larger organisations were much more likely to see CSR as a means of stakeholder management or public relations / marketing. Indeed


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large organisations would define CSR in this way in 42.3% of all cases whereas smaller organisations would do so in only 22.7% of all cases:

Question: How is CSR best defined in your organisation?

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0%

Doing good / philantropy

Important part of marketing / public

relations approach


Part of the business model

Some peoples' personal engagement,

sponsored by the company

Stakeholder management

Part of compliance with laws and

regulations

Employees > 2'000 Employees < 2'000

Furthermore, 76.9% of large organisations would publish a CSR report, whereas 81.8% of smaller organisations would make no such publication:

Question: Does your company publish a CSR report (or similar)?

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0%

Yes

No

Other / don't know


To explain these differences one could surmise that since larger organisations are more “visible” to a larger number of salient stakeholders, and hence paradoxically more vulnerable to “name and shame” campaigns and the like, their self-interest lies in using CSR as a means of risk mitigation. Perhaps this would also explain why large organisations tend more often to have a balanced approach to CSR, not giving priority to e.g. social or environmental issues, as evidenced by the responses to the question “What is the main theme of CSR in your organisation?”:


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Question: What is the main theme of CSR in your organisation?

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0%

Environment (reduce pollution)

Social (local community, employees,

health & safety)

Both (balanced)



5.3.2. Board involvement

We found that large organisations were also much more likely to see their Boards of Directors take responsibility for CSR matters. 77.3% of large organisations had a Board of Directors member or committee specifically responsible for CSR, while this was the case only for 18.2% of smaller organisations.

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0%

Board member or committee

responsible for CSR


5.3.3. CSR project justifications

In general we saw large organisations favour a more structured approach to the justification of CSR projects. As mentioned above, the only organisations using NPV or DCF relevant business cases among the sample were large organisations, no smaller organisations at all using such an approach. Moreover, and in line with the hypothesis that CSR is more relevant as a risk mitigation tool in larger organisations (see above), large organisations were much more likely to base CSR decisions on written justifications involving benefits in terms of risk reduction:

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0%

Written justification involving benefits

in terms of risk reduction



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5.4. Main conclusions

We believe that our survey yielded a few key findings: 1. Attitudes towards CSR, and the justification of CSR projects, are very

different according to organisational size Large organisations are more likely to publish a CSR report, consider CSR as a stakeholder management and public relations / marketing tool, see Board members involved in CSR, and justify CSR decisions in terms of risk management

2. Risk mitigation and assessment play a significant role in CSR practice and justification for large organisations 30.8% of large organisations would justify CSR projects in terms of risk reduction, and the same proportion would define CSR in terms of stakeholder management, suggesting a link to risk mitigation

3. A structured approach towards risk management is correlated with higher quality and more consistent CSR project proposals There was a very strong correlation between the quality of risk assessment activities and the quality and consistency of CSR project proposals

4. Very few organisations, and only large ones, use discounted cash flow based business cases to analyse CSR project proposals Only 3 organisations (out of a total of 52) would indicate use of discounted cash flow based business cases to analyse CSR project proposals.

6. A three-dimensional CSR business case model We believe that the results of our survey support the need for a classification and codification of the possible approaches to CSR business cases in the corporate context, so as to make a range of choices available to the practitioner and to make the identification of adequate justification approaches more easy and straightforward. Classifications had been proposed by Epstein and Roy (2003) and Weber (2007). Epstein and Roy proposed 4 levels of increasing “integration” involving cost / benefit information, where Level 1 would relate to “descriptive information not linked to financial performance” and Level 4 to “monetised information on the benefits of expenditure (i.e. measures of benefits in addition to measures of costs), fully linked to financial performance”. Yet the Epstein and Roy classification does not consider the quality of benefit information, e.g. whether the benefit is obtained in terms of cost savings, additional revenue, or risk reduction, and was not applied to the context of business case proposals. Conversely, Weber’s work relates directly to the elaboration of CSR project proposals and considers three “assessment components” (CSR Value Added, KPIs, and qualitative impacts), but within these components only one – admittedly relatively complete – relates to objectivised monetary benefits for the organisation itself. In fact Weber proposes a valuable template for a CSR business case, but does not within the business case approach propose a qualitative hierarchy between the various inputs and analysis. In the three-dimensional model we propose, we have de facto excluded the lower “levels” identified by Epstein and Roy (2003), where there would be no


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monetised information about expenditure. Indeed we consider that a business case must, as a starting point, contain, albeit with a variable degree of confidence, the expected amount of incremental resource consumption linked to a “go” decision in favour of the proposed CSR action. Likewise we did not specify the availability of narrative argumentation as well as discussion of the strategic fit with organisational objectives, which we have considered to be indispensable in any business case. For each of the three dimensions we propose two or three components, which are not mutually exclusive. However, the components allow for different levels of predictive and decision-making quality; in summary, the more “high quality” components a business case comprises, the better the business case can be in terms of reduced uncertainty and improved decision support.

6.1. Dimension 1: Type of financial benefit

Weber (2007) identifies five “main areas of CSR business benefits” in available research:

1. Positive effects on company image and reputation 2. Positive effects on employee motivation, retention, and recruitment 3. Cost savings 4. Revenue increases from higher sales and market share 5. CSR-related risk reduction or management.

In the context of a CSR business case, we believe that the first two areas, while important for the narrative, will see their effects expressed through the three other ones. We thus propose three components for the “Type of financial benefit”.

6.1.1. Component: Cost reductions

Cost savings may be the consequence of certain CSR relevant activities. A very classic example is the reduction of raw materials or energy use, which reinforces an organisation’s green credentials while reducing cost. Based on the author’s experience such benefits, when they are plausibly part of the business case, are often the most easily quantified. They are very often derived from predominantly objective reasoning, and since the savings involved are mainly of a technical nature, they are frequently calculated in collaboration with professionals who are used to calculations, such as engineers. Conversely, if cost reductions are hoped to be derived from less predictable effects such as employees being “energized by the company's sustainability initiatives” (Willard, 2003), the projected financial effects would in turn be subject to a higher degree of uncertainty.

6.1.2. Component: Revenue increase

Revenue increases may on average be considered more uncertain than cost savings because projections rely on third parties (i.e. the market) to a higher extent. A typical example of anticipated revenue increases could be the higher sales hoped for in the wake of the introduction of an “adopt-a-tree” scheme for a men’s perfume (this example is the reflection of an actual case involving Procter & Gamble’s “Hugo” brand).


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6.1.3. Component: Risk mitigation

Our survey shows that a number of organisations, especially larger ones, see risk reduction as a significant factor in the justification of CSR activities. Nonetheless, because of the importance of subjective judgement, it is often proving difficult to translate risk reduction into monetary benefits in a business case. In principle though, this could be supported by referring to risk management frameworks such as COSO (2004), which prescribe that risks should be assessed for likelihood and impact. In larger organisations this approach is often practiced by departments responsible for risk management, internal audit, or finance. Weber (2007) suggests that “CSR risk-related costs can thus be calculated by multiplying the expected economic impact from CSR-related risks with its probability. As CSR risk-related benefits refer to the avoidance of such negative economic impacts, they can be calculated by multiplying estimated avoided CSR risk-related costs by -1”. While Weber’s suggestion points in the right direction, we believe that it is important to highlight that the expected benefit will not be the complete elimination of a given risk, but rather the incremental reduction of such risk – in other words, Weber’s “-1” factor may be misleading. It is thus proposed, for instance, that the proponents of a CSR business case collaborate with the company or organisation department in charge of risk assessments to identify, discuss and assess possible favourable impacts. For example, suppose that an oil company sees the risk of a delay to an exploration project, costing a potential 10 million USD due to possible protests by local communities, to have a cumulative likelihood of occurrence of 30% over a three year period. A CSR-relevant community programme could have an impact on that risk’s cost, likelihood, or both. For instance, if the potential cost were to be reduced to 8 million USD, the business case for the community programme should consider a benefit of 30% of 2 million USD (the reduction in potential impact), i.e. 600’000 USD. To calculate a net present value of the benefit (i.e. to put a time value on the money possibly “saved”), since the risk is estimated over three years, it could be considered to occur “on average” 18 months from the date of assessment. Even though the result is monetised, the assessment of risk impact and likelihood is very much based on judgement, and the estimation of a potential risk reduction pursuant to CSR activities adds further subjectivity. This is why we consider the Risk reduction component to be the least assured within the “Type of financial benefit” dimension.

6.2. Dimension 2: Specific or generic benefit calculation

Based on our review of literature, we identified categories (see chapter 3) among which Category 2 would contain data aiming to show a positive link between past CSR activity and past financial performance, whereas Category 3 would be concerned with frameworks for organisation specific, predictive business cases. Likewise, we propose to consider the basis on which CSR benefits are calculated in a business case as one of its key dimensions, indicative of structure and quality.


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6.2.1. Component: Specific benefit calculation

Specific benefit calculation would entail that the financial benefits in the business case be based on organisation specific data, information, and reasoning. For instance, in assessing the added revenue to be derived from a new, “greener” product formulation, a company’s marketing department would examine the potential effects of new pricing, positioning, packaging etc. on predicted sales based on experience, scenario reviews, customer panels and so on, and the outcome would be likely to be a sales curve which may have a different profile compared to the baseline.

6.2.2. Component: Generic benefit calculation

Generic benefit calculation would conversely be based on the idea that beneficial effects observed or predicted through third party studies, for instance in scientific papers, may be transposed with few alterations to the organisation in question. For example, a garment producer could decide to implement CSR and expect a 25% increase in sales based on Dao et al.’s analysis4 (2003). It is obvious that a 25% sales increase will not be obtained in all cases were CSR activities are implemented – if there is indeed a link as suggested, it is probable that CSR activities costing a total of 1’000 USD per year will have different effects from activities costing 100’000 USD per year. It seems obvious, then, that specific benefit calculations will yield better assurance as to the probability that predicted financial benefits will come true. Conversely, generic benefit calculations may be a useful complement, for instance as a “sanity check” instrument, to specific benefit calculations. In the garment producer case, if a bona fide CSR programme was predicted through specific benefit calculations to trigger a revenue increase of 15%, Dao et al.’s paper could be used to support the predicted outcome.

6.3. Dimension 3: Type of cash flow analysis

The last dimension of the model pertains to the use of cash flows in the business case.

6.3.1. Component: Discounted cash flow

A discounted cash flow (“DCF”) could be defined as the stream of funds (or losses) that will be generated by a project in the future, reduced to its present day value by applying a discount rate to take into account the time value of money. It is a classic and important tool of business case analysis, allowing to take profitability, time and risk into account when assessing one project, or comparing several projects to each other. The result of a DCF analysis would typically be a Net Present Value, or an Internal Rate of Return. The conditions for applying a DCF analysis to a business case are:

• Cash outlays, inflows, and savings must be established by period (typically by year) until the end of the project, or until a reasonable point in the future (often 5-10 years if the project is not supposed to “end”)

4 According to Dao’s analysis as cited on www.vietnamforumcsr.net: “A recent MOLISA

survey of 24 garment and shoe producers found that CSR implementation has helped the companies increase sales by 25%, increase productivity from 34.2 to 35.8 million VND/laborer/year, and increase total exports from 94% to 97%.”


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• A discount rate must be set. In theory the discount rate reflects the cost of money (interest on loans and / or shareholders’ expected returns on share capital) as well as the risk of the project being assessed. If an Internal Rate of Return is computed, the discount rate will in effect be the hurdle rate below which the business case will be deemed unprofitable.

Once these inputs are available the DCF calculation becomes possible. While of course the inputs, even though they will be expressed in precise numbers, may be subject to significant subjectivity, a DCF analysis is nonetheless required to assess the true financial profitability of a business proposal.

6.3.2. Component: Simple / no cash flow

Despite the importance of DCF analysis, a business case would also benefit from a simple cash flow analysis whereby future cash flows are calculated over a number of years. In this case, the only missing element for a DCF analysis would be the discount rate, which can be difficult to establish, although practitioners often use ad-hoc working assumptions in that respect. Furthermore, it is also possible that inflows and outflows are calculated, but not by period. Again this diminishes the value of the business case as a decision support tool but does not eliminate it.

6.4. The CSR business case model

In order to summarise the proposed three-dimensional model we have represented it as a cube.

The CSR business case model5

6.4.1. Dimensions, components, and elements

Each dimension is represented as a side of the cube, with the components “slicing” the cube in decreasing order of quality from left to right, from front to back, and from top to bottom. The intersection of three components is an element of the CSR business case – for instance, a business case could comprise an element where the benefit is linked to revenue increase, calculated on a generic basis, and calculated by year to derive a discounted cash flow. In total, the model allows for 3 x 2 x 2 = 12 elements. 5 Copyright Jacques Bøgh – all rights reserved


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6.4.2. Quality of a business case

It is obvious that a high number of elements reflects more complete decision support. Likewise, because of the “quality order” of the components, as a general rule elements in the near upper left corner would be of a higher quality than those in the lower far right corner – i.e. the specific calculation of a cost reduction, subject to a DCF analysis, provides better decision support than a risk mitigation benefit based on a generic calculation and not analysed for its cash flow effects.

6.4.3. Relevance beyond CSR

While all of the elements of our model have relevance in business cases concerning non CSR proposals, we believe that two components in particular are less frequently encountered in these cases: Generic benefit calculation, and Risk mitigation. Indeed our review of relevant literature may suggest that CSR proposals seem on average to entail more indirect benefits, which are more easily captured when applying these two components. Non CSR business cases may also make use of these two components, but we would expect this to be the case less often. Hence our model, while covering such instances adequately as well, is nonetheless particularly relevant to CSR business cases.

7. Conclusion In this paper we have reviewed accepted meanings of the expression “business case”, to find that while a business case is always perceived to be a set of arguments in favour of something, the set of arguments may vary significantly in nature and quality. We have examined the literature about “the business case for CSR” and noted that frequently, qualitative argumentation is complemented with more or less specific reference to research purporting to show a positive link between past CSR activity and past financial performance. Conversely, it seems that only a few authors have examined the subject of predictive financial business cases for CSR actions, based on an organisation’s specific situation. We have demonstrated that both agency and stakeholder theories, although they view the corporation from very different perspectives, illustrate or infer the need to use business cases to assess CSR opportunities. We have evaluated the results of a survey of 52 organisations, looking into responsibilities, methodologies, attitudes, and differentiating attributes in relation to the review of CSR projects. We found that attitudes towards CSR, and the justification of CSR projects, are very different according to organisational size; that risk mitigation and assessment play a significant role in CSR practice and justification for large organisations, and that a structured approach towards risk management is correlated with higher quality and more consistent CSR project proposals; and finally, that within our sample very few organisations, and only large ones, use discounted cash flow based business cases to analyse CSR project proposals. Finally we have proposed a three-dimensional model for CSR business cases with a view to providing practitioners with guidance as to the elements of adequate decision support. In this relation, we think that the rational approach to the evaluation of risk mitigation benefits is of particular interest, but also a


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challenge insofar as it calls for close coordination with those in charge of risk assessment. Thus our three-dimensional model supports identification of the strongest CSR opportunities, but also suggests avenues for strengthening CSR justifications in general with a true business case approach. Yet further research would be required to test the application of the model in actual corporate settings and identify any issues in translating theory into practice. In conclusion, the work needed to assemble the elements of a high quality CSR business case is well worth the effort: whether by showing that more CSR proposals are financially sustainable, by supporting a more structured selection process between several CSR options, or making more enlightened decisions in general, organisations only stand to gain in applying the business case discipline to their CSR decision-making process.


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8. References and bibliography

8.1. References

The Centre for Corporate Public Affairs and The Business Council of Australia, 2001. Corporate Community Involvement: Establishing a Business Case, The Centre for Corporate Public Affairs, Melbourne.

Chen L., 2001. Sustainability Investment: The Merits of Socially Responsible Investing. UBS Warburg, London.

COSO (Committee of Sponsoring Organizations of the Treadway Commission), 2004. Enterprise Risk Management — Integrated Framework, Executive Summary. The Committee of Sponsoring Organizations of the Treadway Commission, New York.

Dao Q. V., et al. Summary report of CSR in the garment and footwear sectors, ILSSA, 2003 – as cited on vietnamforumcsr.net. Corporate Social Responsibility. [Online] (September 16, 2007) Available at: http://www.vietnamforumcsr.net/default.aspx?portalid=1&tabid=71&itemid=614 [Accessed 22 July 2010]

Donaldson, T. and Werhane P. 1993. Ethical issues in Business: A philosophical Approach, 4th edn. Prentice Hall, New Jersey.

Donaldson T. and Preston L., 1995. The Stakeholder Theory of the Corporation: Concepts, Evidence, and Implications, Academy of Management Journal, 20: pp. 65-91.

Eisenhardt, M, K., 1989. Agency theory: An assessment and review. Academy of Management Review, 14(1), p. 57

Epstein M. J. and Roy M. J., 2003. ‘Making the Business Case for Sustainability: Linking Social and Environmental Actions to Financial Performance’, Journal of Corporate Citizenship, 9, pp. 79-96.

Foley M. J., 2010. Microsoft makes the business case for Windows Phone 7. [Online] (June 7, 2010) Available at: http://www.zdnet.com/blog/microsoft/microsoft-makes-the-business-case-for-windows-phone-7/6461 [Accessed 3 July 2010]

Freeman, R. E., 1984. Strategic Management: A stakeholder approach. Pitman, Boston.

Godfrey P. C., Merrill C. B., Hansen J. M., 2008. The relationship between corporate social responsibility and shareholder value: an empirical test of the risk management hypothesis. Strategic Management Journal, Volume 30 Issue 4, pp. 425-445

Hewlett S., 2010. How to recruit the best and brightest. [Online] (June 1, 2009) Available at: http://bigthink.com/ideas/14897 [Accessed 3 July 2010]


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Hopkins M. and Cowe R., 2003. Corporate Social responsibility: is there a business case? The Association of Chartered Certified Accountants, London.

Kaplan R. S. and Norton D. P., 1992. The balanced scorecard: measures that drive performance, Harvard Business Review Jan – Feb pp. 71–80.

Kaplan R. S. and Norton D. P., 1993. Putting the Balanced Scorecard to Work, Harvard Business Review Sep – Oct pp. 2–16.

Mattingly JE, Berman S. 2006. Measurement of corporate social action: discovering taxonomy in the Kinder Lydenburg Domini ratings data. Business and Society 45 (1): pp. 20–46.

Pittsburgh Arts Groups, 2009. The Business Case for the Arts. [Online] (September 16, 2009) Available at: http://www.popcitymedia.com/features/BusinessArt%20091609.aspx [Accessed 3 July 2010]

Remenyi, D. and Remenyi, B., 2009. How to Prepare Business Cases. Oxford, Elsevier Science & Technology

Rogowski R., 2007. The Business Case For Rich Internet Applications. [Online] (March 12, 2007) Available at: http://www.adobeacrobatconnectpro.com/engagement/pdfs/bus_case_ria.pdf [Accessed 3 July 2010]

Weber M., 2008. The business case for corporate social responsibility: a company-level measurement approach for CSR. European Management Journal. Vol 26, No 4, pp. 247-261

Willard B. 2002. The Sustainability Advantage: Seven Business Case Benefits of a Triple Bottom Line. New Society Publishers, Gabriola Island.

Zadek S. and Chapman J. 1998. Revealing the Emperor's Clothes: How does social responsibility count? New Economics Foundation, London.

8.2. Bibliography

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9. Appendix

9.1. Survey questions


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