In this research, Professor Yanlong Zhang and his team explores the effects of conformity and differentiation in corporate social responsibility (CSR) practices on the evaluations by security analysts and the responses of the financial market in general. Here, the team developed the argument that while conformity in CSR scope enhances analyst coverage, differentiation in CSR emphasis leads to more favourable analyst recommendations and higher market value. This suggests that firms may be able to simultaneously conform in CSR scope and differentiate in CSR emphasis to achieve optimal distinctiveness. This article appeared on Academy of Management Journal in 2020.

Background: On corporate social responsibility

Since the beginning of the 21st century, corporate social responsibility (CSR) has gradually become an issue of widespread concern and discussion. China’s integration into the global economy has facilitated the diffusion of CSR practices, with consumers and investors increasingly using their purchasing power and capital to encourage socially responsible behaviours. In addition, governmental agencies in China have also provided broad CSR guidelines for firms that specified the scope of socially responsible corporate conduct but not the standards or priorities of relevant fields. This pressures firms to conform but also offers the opportunity for firms to differentiate CSR activities based on their unique features.

In the context of CSR, the scope dimension captures the extent to which a firm covers a wide range of CSR issues such as environmental protection, labor practices, product quality and safety, and fair operating practice. On the other hand, the emphasis dimension reflects the content of a firm’s specific CSR activities, or the extent to which a firm’s pattern of CSR emphasis deviates from the common patterns of other firms. It thus indicates the uniqueness of firms’ CSR practice as compared to their peer group.

The Role of Chinese Security Analysts and Financial Markets

Security analysts are considered a representative audience whose evaluations of organisational practices have important implications for firm strategy and performance. As a key information intermediary in the securities market, the research reports of security analysts on listed companies, as well as the recommendation and rating of corresponding stocks, form the basis for important decisions made by the investors. In addition, CSR reporting is gradually becoming an important source of non-marketing information disclosure, and analysts have been learning to distinguish different types of CSR activities to establish a criteria to evaluate whether firms’ CSR efforts can contribute to future performance.

The study points out that the analysts’ evaluation model shows two distinct phases: familiarising and reasoning. The goal of the first stage, which is closely related to analyst coverage decisions, is to determine the extent to which firms’ practices in certain fields meet the established guidelines or conventions. In the second stage, analysts favour practices that are unique or span existing fields because they are considered more capable of handling the case in point. Analysts are then likely to explore in greater depth how specific CSR activities can serve the firm’s strategic purposes, where firm efforts that are intended to align CSR activities with idiosyncratic firm features are preferred. The empirical results verify this hypothesis and show the response of securities analysts to different dimensions of CSR activities.

Findings

Using the case of corporate social activities of Chinese listed firms during the period from 2008 to 2014, the team showed that scope conformity has a stronger effect on analyst coverage for state-owned firms and firms with higher visibility. On the other hand, the relationship between emphasis differentiation and analyst recommended market value strengthens for firms covered by high-status brokerage houses but weakens for those experiencing high earnings pressure.

In the context of analysts’ evaluations of firms’ CSR practices, the findings suggest that firms can strategically configure their responses across different dimensions of CSR practices to secure analysts’ preferences and enhanced performance evaluations. Specifically, firms are positively received by analysts when they make efforts to cover more important CSR fields that are congruent with normative and regulative expectations, and when the deployment of attention across different CSR fields reflects their idiosyncratic needs or positioning.

In addition, this study also argues that the extent of conformity pressure varies across forms. Here, the team found that state ownership and firms’ visibility lead to variations in firms’ legitimacy pressure, which in turn conditions the effectiveness of firms’ conforming actions. The results indicate that firms that depend on the state for critical resources and legitimacy may feel a greater imperative to conform to regulatory pressure. Similarly, firms that attract more market attention are expected to conform to the expectations of the general public. Thus, firm decisions on CSR conformity need to take the influences of various stakeholders into account.

On the other hand, the effectiveness of emphasis differentiation in CSR practices largely varies with the extent to which audiences appreciate the firm’s differentiation efforts. This study found evidence suggesting that the higher reputation and stronger legitimacy base enjoyed by high-status brokerage houses allow analysts associated with such houses to show greater flexibility and make bolder forecasts when facing ambiguous classifications and innovative offerings. Also, this study highlights the fact that the extent to which audiences appreciate a firm’s differentiation effort can be affected by whether the firm has gained fundamental, pragmatic legitimacy in terms of financial performance.

Practical implications

These findings have practical implications for corporate executives who are responsible for designing firms’ social programs. In considering their strategic options, many managers still focus on rankings in various sustainability or corporate philanthropy indices, and try to achieve a higher ranking by investing much time and effort in tailoring their social program according to the reporting frameworks specified by the rating agencies. However, while such practices may help firms obtain basic legitimacy from the investment community, they fall short in convincing the audience that firms’ social practices are well aligned with firms’ competitive positioning and the market contexts in which they operate. Executives are thus advised to fully appreciate the complexity of CSR practices and to more effectively orchestrate their efforts in the overt versus substantive dimensions of the practice.

Conclusion

Overall, this paper borrows insights from the optimal distinctiveness literature and advances this line of inquiry by investigating the way that firms orchestrate different dimensions of CSR practices to simultaneously cope with conformity pressure and seek differentiation advantages. As firm stakeholders, the general public and many national governments increasingly view CSR as an essential component of corporate activities, this study provides a new perspective for understanding how firms cope with such complex forces to get ahead in the new environment.

About the Author

Zhang Yanlong is an Associate Professor of Organization and Strategy Management. He is currently serving as the Executive Director of the MBA and MSEM program at Guanghua School of Management at Peking University. He was awarded as the Young Scholars of the Ministry of Education's "Chang Jiang Scholars Program". He received his BA and MA in sociology from Peking University in 2002 and 2005, and received his Ph.D. in sociology from Duke University in 2012. His research interests include organization theory, social networks, corporate social responsibility, entrepreneurship, and policy diffusion. He published over twenty articles in leading management and sociology journals such as Academy of Management Journal, Organization Science, Academy of Management Annals, Journal of Business Venturing, and Social Networks. He received Peking University Teaching Excellence Award in 2016; and in the same year received the Brand English Language Course Award from the Ministry of Education. He won the first prize in Peking University Young Faculty Teaching Contest in 2018, and the KGKF (Kerry Group Kuok Foundation) Award for Mentoring Excellence in 2020.