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A deep dive into cause-related marketing

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Corporate charity campaigns and donations are popular marketing tools. But do they pay off?

In recent years, cause-related marketing campaigns — based on a firm’s support of social issues — have become key components of corporate social responsibility (CSR) efforts. And with good reason: In a recent survey, 80 percent of global consumers said they thought businesses should play a role in addressing social problems. Accordingly, spending on cause-related marketing has grown from US$816 million in 2002 to $2.14 billion in 2018.

Business leaders can be a powerful force for good — especially during a crisis. As leaders forge their way through the challenges COVID-19 is bringing and plan for what is likely to be an extended recovery, it’s important for them to be aware of the strengths and limitations of cause-related marketing.

Generally, there are two approaches to cause-related marketing: making monetary donations and providing in-kind donations (the latter involves contributing products, services, or expertise).

Past research has suggested cause-related marketing efforts improve consumers’ attitudes toward a firm and increase their likelihood of purchasing its products or services. But the jury is out on whether these campaigns — which tend to be costly because they involve the charitable donations or the allocation of resources on top of normal marketing expenses — actually pay off and generate revenue. According to a new study, though, investors are surprisingly discerning when it comes to evaluating these campaigns.

To be sure, leaders must consider many factors when designing a full corporate giving program. And both monetary and in-kind donations certainly have value where CSR is concerned.

To explore the issue, the study’s authors compiled a list of the 62 cause-related campaigns launched by U.S. public companies that made Fortune’s World’s Most Admired Companies list between 2005 and 2017. The firms represented 54 industries and donated to 121 different nonprofit organizations, foundations, and government agencies through their campaigns.

To assess investor reaction, the authors measured the firms’ abnormal stock return — that is, the deviation from the predicted return, all else being equal — in the days following the conference call or press release announcing the campaign. They controlled for a variety of factors that could also affect stock price, including firm size, industry, and debt.

More than half the time, the authors found, shareholder response to these announcements was negative. That’s not particularly surprising, because CSR initiatives can divert scarce resources from core business pursuits. But delving deeper, the authors found that certain factors led to positive shareholder reaction. The most significant factor was the type of donation: In-kind offerings were viewed more positively than monetary donations. Other factors were the firm’s reputation, the industry involved, and the way in which the press release announcing the effort was crafted.

The difference in shareholder reaction may be attributable, the authors note, to the fact that psychological studies show donations of time or services tend to trigger strong emotional and moral impulses in participants, whereas monetary gifts typically elicit rational or economic value–based responses. So it stands to reason that shareholders may associate campaigns built around in-kind donations as more emotionally appealing and suggestive of a firm’s commitment to social welfare.

Additionally, in-kind campaigns may be more attractive to shareholders than monetary ones because they also have a pragmatic side: Companies can reap tax benefits from the donations and shed excess or outdated inventory in the name of a good cause. Furthermore, investors may recognize that CSR efforts carried out on the company clock are good for workplace morale: Increasingly, employees want their companies to get involved in the community, and contributing employee time to good causes can expand skill sets while also deepening workers’ commitment to a firm and making them less likely to leave. Reduced turnover and a happy workforce bode well for future cash flow.

Investors may recognize that CSR efforts made on the company clock are good for workplace morale.

Further, the authors found that investors reacted more positively to campaigns announced by firms with a strong reputation, as evidenced by high rankings or repeat showings on the Most Admired list. In this case, the authors posit that shareholders may view these campaigns as a kind of insurance for well-respected firms against backlash over possible future misdeeds, accidents, or downturns.

Moreover, investors were more receptive to cause-related campaigns launched by firms in competitive, fast-moving industries, in which embracing social causes could give them a competitive edge over rivals. Companies with higher returns on equity also got a positive response from shareholders, who presumably reason that firms with greater resource slack deserve more discretion in their spending decisions.

The study shows that investors have strong reactions to the press releases or official announcements crafted by firms. As a result, managers must pay close attention to the language they use when promoting their cause-based campaigns, regardless of the type of donations they decide to make. Play up the firm’s available resources, the authors suggest, and underscore positive financial performance, because these factors can mitigate some of the negative investor concern.

In a similar vein, managers at high-status firms should stress the firm’s standing in the industry and community, and include information about awards or rankings when discussing cause-related campaigns. This approach will help remind skeptical investors why the firm has such a strong reputation to begin with. Conversely, leaders at struggling companies should emphasize in-kind donations, in a bid to alleviate investors’ concerns about wasting precious financial resources.

As CSR programs continue to gain traction, leaders must be careful about which programs they choose to pursue. The potential pitfalls and advantages of a program must be thoroughly examined to determine how it — and by extension, the company — may be perceived by the public and shareholders. Choosing the right CSR for a firm may require careful attention and time, but when done correctly, it will only benefit a firm and its reputation.

Source: “The effect of cause-related marketing on firm value: A look at Fortune’s most admired all-stars,” by Parker J. Woodroof, George D. Deitz, Katharine M. Howie, and Robert D. Evans Jr., Journal of the Academy of Marketing Science, Sept. 2019, vol. 47, no. 5

Matt Palmquist

Matt Palmquist is a freelance business journalist based in Oakland, Calif.

 
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