For corporations, social responsibility has become a big business. Companies spend billions of dollars doing good works — everything from boosting diversity in their ranks to developing eco-friendly technology — and then trumpeting those efforts to the public.
But does it pay off?
Many companies hope consumers will pay a premium for products made with higher ethical standards. But most companies plunge in without testing that assumption or some other crucial questions. Will buyers actually reward good corporate behavior by paying more for products — and will they punish irresponsible behavior by paying less? If so, how much? And just how far does a company really need to go to win people over?
To find out, Wall Street Journal conducted a series of experiments. They showed consumers the same products — coffee and T-shirts — but told one group the items had been made using high ethical standards and another group that low standards had been used. A control group got no information.
In all of their tests, consumers were willing to pay a slight premium for the ethically made goods. But they went much further in the other direction: They would buy unethically made products only at a steep discount.
What’s more, consumer attitudes played a big part in shaping those results. People with high standards for corporate behavior rewarded the ethical companies with bigger premiums and punished the unethical ones with bigger discounts.
It had been discovered that companies don’t necessarily need to go all-out with social responsibility to win over consumers. If a company invests in even a small degree of ethical production, buyers will reward it just as much as a company that goes much further in its efforts.
What are ethically produced goods?
For our purposes, we will define “ethically produced” goods as those manufactured under three conditions. First, the company is considered to have progressive stakeholder relations, such as a commitment to diversity in hiring and consumer safety. Second, it must follow progressive environmental practices, such as using eco-friendly technology. Finally, it must be seen to demonstrate respect for human rights — no child labor or forced labor in overseas factories, for instance.
Even though we think ethical production can lead to higher sales, not all consumers will be won over by the efforts. Some may prefer a lower price even if they know a product is made unethically.
For companies, the implications of this study — albeit limited — are apparent. Efforts to move toward ethical production, and promote that behavior, appear to be a wise investment. In other words, if you act in a socially responsible manner, and advertise that fact, you may be able to charge slightly more for your products. On the other hand, it appears to be even more important to stay away from goods that are unethically produced. Consumers may still purchase your products, but only at a substantial discount.
It seems that once companies hit a certain ethical threshold, consumers will reward them by paying higher prices for their products. Any ethical acts past that point might reinforce the company’s image, but don’t make people willing to pay more. Companies should segment their market and make a particular effort to reach out to buyers with high ethical standards, because those are the customers who can deliver the biggest potential profits on ethically produced goods.
The experiment also found that the single most important ethical leadership behavior is “keeping promises,” followed by “encouraging open communication,” “keeping employees informed,” and “supporting employees who uphold ethical standards.” If an organization has leaders who simply don’t “walk the talk” when it comes to ethics, there’s little hope of maintaining a strong ethical culture.