Corporate social responsibility (CSR) has become an increasingly important and challenging issue for companies in today's business world. The Financial Times, a newspaper, defines CSR as "a business approach that contributes to sustainable development by delivering economic, social, and environmental benefits for all stakeholders". Many firms have recognised the vital role of CSR for long-term success and have attempted to integrate such an approach into their business strategies. Examples include a commitment to the environment by Starbucks, a coffeehouse chain, through its Shared Planet programme, and an initiative by Patagonia, a retailer of outdoor clothing, to ensure that its products are produced under safe, fair, and humane working conditions throughout its supply chain. At the same time, scandals caused by irresponsible and incompetent corporate behaviour have abounded in the media recently. For instance, Greenpeace, a global campaigning network, has called attention to the serious problem of toxic water pollution resulting from the textile industry’s release of hazardous chemicals in China. Their report also identifies the global brands that source from such polluting textile suppliers, including household names such as Abercrombie Fitch, Calvin Klein, Converse, and H&M. These companies have implemented neither comprehensive chemical management policies nor clear measures to restrict the release of hazardous substances into water beyond local regulations. This negligence of corporate responsibility has not only led to serious social and environmental consequences, but has also gained wide public attention and generated discussion about the role of both private and public organisations in society.

Dr Guang Xiao Associate Professor Department of Logistics and Maritime Studies

In practice, firms may have distinct motives when deciding if or how to engage in CSR. The existing literature identifies two major types of CSR motives: extrinsic and intrinsic. Extrinsically motivated firms are purely profit oriented. For such firms, any decisions about whether to behave responsibly are based on profit considerations. By contrast, the CSR motives of intrinsically motivated firms are not purely profit oriented. Such firms are willing to embrace a CSR strategy that reflects their managing team's ethical standards and attitudes towards responsible corporate behaviour, even if this means incurring higher costs.

Consumers around the world have become increasingly aware of CSR. In 2015, Cone Communications, a public relations and marketing agency, and Ebiquity, a consultancy, jointly surveyed 9,709 consumers in nine countries. They found that the majority of consumers had a strong desire for firms to pay attention to social and environmental issues. Such consumers were keen to participate in CSR efforts, believing that firms had a responsibility to do more than merely make a profit. Specifically, the survey found that about 31% of participants would reward a company for operating responsibly, such as paying a higher price for its products; 19% would punish a company for irresponsible behaviour, such as paying a lower price or boycotting its products; 40% would equally reward or punish a company based on how it operates; and the remaining 10% would not care about CSR when making purchase decisions. Such trends have consistently increased in recent years as more consumers have become active advocates of CSR activities through their purchase decisions.

Despite this growing awareness of CSR, potential barriers prevent consumers from knowing whether a firm is truly responsible. First, CSR is a broad concept and covers many aspects of a firm's business activities. As a result, consumers usually have limited information on which to judge whether a firm is responsible or not. Second, even though many firms voluntarily disclose their CSR activities, there are great variations in their reports due to a lack of consistent reporting standards. Finally, since consumers are unable to verify firms' practices, they may not fully believe the information that firms disclose. Such information asymmetry may distort consumers' goodwill and even lead them to draw their own, possibly incorrect, conclusions about firms’ CSR practices. It is hence becoming commonplace for consumers to demand transparent information.

Many firms have realised the importance of publically communicating their CSR practices. Price is one natural and intuitive instrument firms can use to demonstrate their costly CSR efforts. Engaging in CSR activities may cause firms to incur higher costs, both in order to comply with social and environmental standards, and to refine their production processes and technologies. Charging higher prices can thus help firms signal to consumers that they are engaging in costly CSR practices.

Besides price, firms often use other channels to convey information about their CSR activities. For example, a firm may promote its CSR standards by applying for ISO 26000 or SA8000 certification, Fairtrade certification, or various green labels; by issuing public reports (e.g., the Global Reporting Initiative), or by using media coverage to advertise its CSR activities. However, these channels may not reveal a firm’s CSR standards perfectly. Such channels usually suffer from noise for many reasons including statistical errors, bribery, and human biases, all of which lead to imperfect information revelation. To take the example of third-party certification, a certified firm may violate CSR standards, while not all qualified firms are certified. For such reasons, consumers can only obtain partial information about a firm's CSR practices via these disclosure channels.

In this context, Dr Guang Xiao and Dr Xiaomeng Guo from the Department of Logistics and Maritime Studies, together with their co-author Prof. Fuqiang Zhang, have been working on a project titled Adoption of Corporate Social Responsibility under Asymmetric Information. In this study, they investigated the interaction between a firm and its consumers in the presence of CSR considerations and asymmetric information. Specifically, they wanted to know: How does consumer awareness of CSR and the reward/punishment behaviours of consumers affect a firm's CSR engagement decision and its associated profitability? and How do information disclosure mechanisms such as certification affect firms' CSR decisions and profits? Making use of a signalling-game framework, Dr. Xiao provides a set of managerial implications to answer these research questions.

First, with asymmetric information about a firm’s CSR adoption, increasing the fraction of responsible consumers may reduce the profit of being responsible and improve the profit of being irresponsible. Moreover, consumers' stronger punishment may hurt the profit of being responsible, and their stronger reward may improve the profit of being irresponsible. As such, one should be cautious about promoting awareness of CSR and encouraging customers to engage in reward-and-punishment behaviour. Haphazard efforts to reward responsible activities and punish irresponsible activities by influencing consumer behaviour may lead to the opposite of the desired outcomes.

Second, with asymmetric information, an extrinsically motivated profit-maximising firm will never choose to engage in CSR with price signalling alone, even when the market has a sufficient number of socially responsible consumers. However, when the firm can communicate its chosen CSR strategy through both price and noisy certification channels, it will choose to behave responsibly if there are sufficient responsible consumers and if the accuracy of the certification is high. In addition, higher certification accuracy always improves the benefit of responsible behaviour, but may either improve or reduce the benefit of irresponsible behaviour.

These findings have useful managerial implications. Due to information asymmetry, intuitive strategies to induce or recompense socially responsible behaviour may not work as desired. Without transparent information, promoting consumer awareness through advertising and educational programmes may backfire. Therefore, efforts are first needed to restore information transparency. The goodwill of socially concerned consumers can then be aligned with firms' incentives to pursue responsible business practices. This corroborates with evidence that more firms have tried over the years to create transparency about their business practices, and more governments have started to encourage or mandate credible sustainability reports from firms.