Mind the gap: The interplay between external and internal actions in the case of corporate social responsibility

• Date: 01 December 2016
• Published date: 01 December 2016
• DOI: http://doi.org/10.1002/smj.2464
• Author: Olga Hawn,Ioannis Ioannou

Strategic Management Journal

Strat. Mgmt. J.,37: 2569–2588 (2016)

Published online EarlyView 4 February 2016 in WileyOnline Library (wileyonlinelibrary.com) DOI: 10.1002/smj.2464

Received 5 June 2013;Final revisionreceived 2 September 2015

MIND THE GAP: THE INTERPLAY BETWEEN

EXTERNAL AND INTERNAL ACTIONS IN THE CASE

OF CORPORATE SOCIAL RESPONSIBILITY

OLGA HAWN1*and IOANNIS IOANNOU2

1Department of Strategy and Entrepreneurship, Kenan-Flagler Business School,

University of North Carolina Chapel Hill, Chapel Hill, North Carolina, U.S.A.

2Department of Strategy and Entrepreneurship, London Business School, London,

U.K.

Research summary: We explore the effect of the interplay between a rm’s external and internal

actions on market value in the context of corporate social responsibility (CSR). Specically,

drawing from the neo-institutional theory, we distinguish between external and internal CSR

actions and argue that they jointly contribute to the accumulation of intangible rm resources

and are therefore associated with better market value. Importantly, though, we nd that, on

average,rms undertake more internal than external CSR actions, and we theorize that a wider gap

between external and internal actions is negatively associated with market value. We conrm our

hypotheses empirically, using the market-value equation and a sample comprising 1,492 rms in

33 countries from 2002 to 2008. Finally, we discuss implications for future research and practice.

Managerial summary: Companies often accumulate intangible assets by taking internally and

externally oriented CSR actions. Contrary to popular beliefs, the data show that they undertake

more internal than external ones: rms do more and communicate less. How does a potential gap

(i.e., a misalignment) between internal and external CSR actions affect a rm’s marketvalue? We

nd that although together (the sum of) internal and external actions are positively associated

with market value, a wider gap has negative implications. In other words,rms do not realize the

full benets of their internal actions when such actions are not externally communicated to key

stakeholders, and to the investmentcommunity in particular. This negative association with market

value is particularly salient in CSR-intensive and the natural resourcesand extractives industries.

Copyright © 2015 John Wiley & Sons, Ltd.

INTRODUCTION

In recent years, rms have undertaken an increas-

ing number of voluntary environmental, social, and

corporate governance initiatives—often referred

to collectively as “corporate social responsibility”

(CSR) actions (Carroll, 1979; Hillman and Keim,

2001; Waddock and Graves, 1997)—in response

Keywords: corporate social responsibility (CSR); sustain-

ability; market value; legitimacy; external and internal

actions; market-value equation

*Correspondence to: Olga Hawn, McColl 4604, CB 3490, Chapel

Hill, NC 27599, U.S.A. E-mail: olga.hawn@gmail.com

Copyright © 2015 John Wiley & Sons, Ltd.

to growing institutional pressures for responsible

practices, community involvement, increased trans-

parency, higher labor standards, reduced green-

house gas emissions, and numerous other social

and environmental causes (Campbell, 2007; Wad-

dock, 2008). Firms respond to such pressures by

taking actions aimed at audiences external to the

organization (e.g., branding, disclosure, partner-

ships) as well as those that target internal audi-

ences (e.g., training, forming board committees).

These actions may be taken proactively to miti-

gate the risk of potential stakeholders’ backlash or

retroactively to integratestakeholders’ demands and

expectations into the rm’s operations, structures,

and processes (Crilly, Zollo, and Hansen, 2012; Fiss

2570 O. Hawn and I. Ioannou

and Zajac, 2006; Neumann et al., 2013). Respond-

ing to stakeholder pressures through CSR is increas-

ingly perceived as a key determinant of long-run

rm prosperity (Clarkson, 1995; Eccles, Ioannou,

and Serafeim, 2014; Hillman and Keim, 2001), and

the overall relationship between CSR and rm per-

formance has been found to be statistically signi-

cant and positive (Margolis, Elfenbein, and Walsh,

2009). However, the literature to date has not the-

oretically distinguished between different types of

CSR actions that rms undertake; thus, the key issue

of how the dynamic interplay between external and

internal CSR actions may be associated with rm

performance remains underexplored.

Anecdotal evidence suggests that rms undertake

external and internal CSR actions in many different

ways and to different extents. Unilever, for example,

formalizes its internal CSR actions through its “Sus-

tainable Living Plan” strategy while also undertak-

ing several external actions to communicate to key

stakeholders, and to capital market participants in

particular, the objectives and outcomes of that strat-

egy. Paul Polman himself, Unilever’s CEO, often

explains that the main goal of this strategy is to

double Unilever’s sales while reducing its environ-

mental impact. Through detailed reports and other

disclosures, the rm explains why this goal makes

business sense, sets out intermediate targets on its

way to reaching the overall goal, and elaborates on

how it plans to achieve them.1In other words, by

aligning internal and external actions, Unilever lays

the foundation for internal transformation as well as

external credibility.

However, many rms that contribute positively

to society and the environment through their daily

operations, their products and services, and impor-

tantly, their internal CSR actions do not sufciently

and strategically complement and convey their con-

tributions through external CSR actions. TriplePun-

dit, a leading global media resource on CSR issues,

identies the lack of external actions as the num-

ber one mistake rms make with respect to CSR.2

The resulting gap between their external and inter-

nal actions prevents the full value of their CSR

engagement from being reected in their market

performance.

1See Unilever’s “Sustainable Living Plan—A Progress Report”

at: http://www.unilever.co.uk/Images/USLP-Progress-Report-

2012-FI_tcm28-352007.pdf (accessed 9 May 2015).

2For more information, please see http://www.triplepundit.com/

2012/07/top-10-mistakes-cr-communications/ (accessed 9 May

2015).

On the other hand, some companies engage in

external actions to a greater extent than internal. For

example, in 2000 British Petroleum (BP) reportedly

spent $7 million researching the new “Beyond

Petroleum” Helios brand and $25 million on a

campaign to support this brand change; it was a

“triumph of style over substance,” as Greenpeace

later concluded, because BP spent more on its

logo that year than it did on renewable energy

the previous year (Visser, 2011). BP undertook

relatively more external actions than its set of

internal actions could justify; as a result, it risked

being identied as a “green-washing” company.

Given this wide range of approaches to the mix of

external and internal actions, an important question

arises regarding the dynamic relationship between

them and, in particular, how it may be associated

with market value. In this study, we explore this

question in the CSR setting for three main rea-

sons. First, the issue of alignment or misalignment

is particularly salient in this context given that an

increasing number of rms worldwide undertake

CSR actions both inside and outside the organiza-

tion (Weaver, Trevino, and Cochran, 1999b). Sec-

ond, anecdotal evidence conrms that the degree

to which internally and externally focused actions

are aligned differs signicantly across rms. For

example, the Boston Consulting Group and the

MIT Sloan Management Review trace differences

between (1) companies whose actions match their

stated beliefs and (2) companies whose beliefs

and actions are out of sync. They nd that only

40 percent of organizations report addressing sus-

tainability issues, and that only 10 percent are fully

tackling them.3Third, a rm’s intangible resources

are a key element for understanding the mecha-

nisms through which CSR actions are associated

with value creation. For example, Surroca, Tribó,

and Waddock(2010) provide empirical evidence for

the mediating effect of a rm’s intangible assets in

the CSR-value creation process.

Our main theoretical focus therefore is on arguing

for a salient distinction between external and inter-

nal actions and on understanding how the interplay

between them is associated with rm performance.

Weargue for a joint effect of the dynamic accumula-

tion of intangible rm resources via the undertaking

3For more information, please see: https://www.bcgperspectives.

com/content/articles/sustainability_process_industries_

sustainability_next_frontier_walking_talk_issues_matter_most/

(accessed 9 May 2015).

Copyright © 2015 John Wiley & Sons, Ltd. Strat. Mgmt. J.,37: 2569–2588 (2016)

DOI: 10.1002/smj