Research Roundup: The Financial Impact of Social Impact

Social impact has become a buzzword in business, but what does the evidence say about the success of social impact initiatives? In separate research papers, three Wharton professors — Deborah Small, Franklin Allen and Susan Wachter – look at whether “doing good” means doing well in different contexts: When it comes to corporate image, are “nice” firms perceived as less likely to succeed? How can banks serve rural populations and remain profitable? And can something as simple as planting a tree in an urban setting bump up real estate prices?      

This research reflects an ongoing effort by Wharton faculty, and particularly the school’s Social Impact Initiative, to examine how business knowledge and strategy can be leveraged to solve pressing social problems. This week (April 8-12) has been designated Wharton Social Impact Week.

Why Consumers Don’t Want Companies to Do Well by Doing Good

You hear it all the time in the business world, on the ball field or even at the singles bar: “Nice guys finish last.” But what does this actually mean? Do people really believe this? And how do people reconcile this saying with the commonly held belief that good things happen to good people?

Wharton marketing professor Deborah Small and Fern Lin-Healy, a marketing professor at Auburn University, examined the perceptions behind this aphorism and its converse in their new study, “Nice Guys Finish Last and Guys in Last are Nice: The Clash Between Doing Well and Doing Good,” published in the journal Social Psychological and Personality Science in February.

The type of “niceness” that Small and Lin-Healy focus on in the paper is altruism and positive actions aimed at helping others. Specifically, they look at the motivation behind good deeds and the perception others have of “nice” guys. “We all have a prototype in mind about altruism,” Small says. “Signals from behavior and environment that diverge from this prototype raise cynicism.”

While the saying about nice guys commonly applies to individuals, Small thought it was important also to look at companies, since consumers tend to personify corporations. To examine the motivation of a nice guy (or business), Small and Lin-Healy first studied perceptions of what drives people to do good (or not). Participants were asked to read scenarios involving acts of altruism by individuals and companies.

For the individual case, participants were presented with a situation in which spectators at a professional football game had the opportunity to donate $100 to charity and then be entered into a raffle to win dinner with the players. Some subjects read a scenario in which a person entered the raffle because he really wanted to win the dinner; others read about someone who entered because he wanted to help the children’s charity receiving the donations.

Participants were then asked to rate how likely they thought the donor in question was to win the raffle. In line with “nice guys finish last,” the researchers note, “donors whose motivation was selfless were perceived as having a worse chance of winning the raffle than the donor whose motivation was selfish.”

To examine perceptions of corporations, participants were asked to read scenarios about a company that was making costly changes to its manufacturing process in order to become more environmentally friendly. The financial impact of the adjustments was so great that the firm would only make a profit the following year if there was unusually high snowfall in the area where it did business. Half of the participants were given a scenario in which the firm made the changes because its leadership wanted to be socially responsible, while the other half were told that the company took on the project purely to generate good press. Just as in the individual case, participants perceived the company with good intentions as less likely to have a positive outcome.

In the “guys in last are nice” phase of the research, the authors focused more on the outcomes of doing good. Working off the same situations as in the initial stage, participants read about a charity raffle being organized by a football team. Half of the scenarios simply said that the team was selling tickets, while the other half said that anyone who bought a souvenir helmet was automatically entered in the contest. When participants were asked about the charitableness of those depicted in each scenario, winners were perceived as less charitable in the raffle scenario, but not in the purchase scenario — even though there was no mention of why anyone in either situation was motivated to enter the contest.

To look at this effect for companies, study subjects were asked to read about a business making environmentally friendly changes to its manufacturing process or about a firm that already had acceptable environmental standards. The businesses were depicted as performing either financially better due to high snowfall or lower than expectations due to less than average snow. Again, participants viewed the firms that benefited due to the high snowfall as being less altruistic than those whose profits were damaged by lower than normal snow.

Both Small and Lin-Healy say that they were surprised by the results of the second study, where people perceived good intentions as leading to worse results, no matter how random. “I find these results fascinating because our scenarios involve outcomes that are blatantly random and uncontrollable,” Lin-Healy notes. “The effects we find defy logic. Furthermore, they contradict deeply ingrained cultural and religious teachings.”

For example, the research contradicts the commonly accepted theory of “belief in a just world,” in which people believe good things happen to good people. “Our results fly in the face of that,” Small says. “I think it is because altruism is irreconcilable with benefits to the altruist, in people’s minds.”

As the researchers note in the paper, “People believe that truly good deeds involve sacrifice and preclude benefits to the self. When a pro-social actor benefits, then their goodness is tainted by self-interest.” Small and Lin-Healy point to Mother Teresa — who refused the typical ceremonial banquet when she won the Nobel Prize and donated her monetary award to charity — as a “model altruist, not just because of her many good deeds, but also because of her sacrificial stance about them.”

These counter-theory results can also be applied to real world experiences, including efforts to understand how motivation and outcomes influence judgments. “Companies and individuals need to realize that people are sensitive to signals about motives for actions,” Small says. “Actions are not enough. It’s the interpretation of those actions that matters.”

Lin-Healy adds that their research also shows that businesses may have to make compromises when it comes to being socially responsible while also attracting investors. “On the one hand, customers value socially responsible companies. On the other hand, investors value companies with bright financial outlooks,” she says. “Companies need to think carefully about how to strike a good balance.”

How a Kenyan Firm Brought Banks to Rural Areas — While Making a Profit

In 2006, just 14% of households in Kenya had bank accounts. Three years later, nearly a quarter of households had one. During the same time frame, branches of Nairobi-based financial services company Equity Bank increased from 44 to 110 in the East African country, giving it 50% of all deposits and 30% of all loans in Kenya, including many in rural districts.

Intrigued by this impressive growth in a part of the world where traditional banking is still on the fringe, Wharton finance professor Franklin Allen, Boston College finance professor Jun Qian and four of their colleagues decided to look into what made Equity’s branching strategy work and what effect its expansion had on households’ access to banking services. They present their findings in “Improving Access to Banking: Evidence from Kenya,” published last summer.

“They developed a low-cost way of managing bank accounts and were able to reach rural areas,” Allen says of Equity Bank. “It’s a wonderful success story, and they were able to do it and still be a profitable company.”

Besides just looking into Equity Bank’s numbers and branching strategy, the research team also looked at the competition, including Kenyan-based banks and foreign institutions. For example, the overall number of bank branches in Kenya between 2006 and 2009 increased 68% to a total of 1,000 (compared with Equity’s 155% increase in the same time period). Local private banks, like Equity, were much more likely to expand into poorer, rural districts, according to the paper. The researchers also examined data from FinAccess surveys, which queried 4,420 Kenyans in 2006 and 6,598 in 2009, taking a sample from all districts and asking them about their financial habits.

Going beyond the basic facts on Kenyan banking from 2006 to 2009, Allen, Qian and their colleagues came up with formulas that took into account distorting factors, most notably the idea that branching is not a random event. “Equity’s presence could be more a feature of a relatively developed banking district than a cause of greater uptake of accounts,” the researchers write.

“I think just looking at the number of branches and so on isn’t enough,” Allen adds, noting the importance of running various formulas to come up with the true effects of Equity’s branching explosion. According to the researchers, the presence of Equity Bank branches had “a positive and significant impact on households’ use of bank accounts and bank credit. The effect is particularly strong for Kenyans with low income, no salaried job and less education, and those who do not own their own home.”

What makes Equity’s branching strategy successful, Qian says, is that the bank started its expansion in areas with higher household incomes that the foreign banks had not tapped into yet. Once Equity became established in these modestly wealthy neighborhoods, it then went into the less developed areas of the country. “They have found a for-profit sustainable model for growth, while still expanding into rural areas,” Qian notes.

There were two primary features that made the new Equity branches so successful at attracting customers, Qian adds. First, the bank hired employees who spoke the nation’s minority languages. Second, Equity has very basic requirements for opening a bank account: The institutions require only an ID and a photo (which could even be taken at the branch), the researchers note, whereas many foreign banks mandate a minimum balance of 20,000 Ksh (about $222). “Equity Bank seems to have seized upon these opportunities more quickly than other banks and, regardless of Equity’s motivation, the end result has been greater financial inclusion,” the paper states.

Equity’s branching and business model is also something that can be replicated by other banks in Kenya and by banks in other countries looking to reach developing areas, according to Qian and Allen. In fact, Equity has already begun expanding into Uganda and South Sudan. Allen says other banks should consider hiring employees who speak the local dialect. Additionally, banks should use more modern technologies, as Equity has, to reach underdeveloped areas. For example, another big Kenyan financial success story is M-PESA, a mobile payment system now used by 40% of Kenyans.

“Equity Bank’s business model … can be a viable solution to the financial access problem that has hindered the development of the financial sector in many developing countries,” the authors write.

And while nonprofit microfinance organizations are the main issuers of credit to the poor in other developing countries, Qian says that in the end, for any group to be successful at providing banking services to the poor, it has to be profitable and not supported by the government and foundation grants.

“What amazes me is this thing works in Kenya, even for people living where no bank on earth would go to do business, and the [institution] can still make money,” Qian notes. “I think the best thing out of this is that there is hope that no matter how poor or underprivileged or lacking in basic infrastructure an area is, you can still have access to financial services.”

The Positive Economics of Planting a Tree

If a tree grows in Brooklyn — or Philadelphia, Chicago or any urban landscape — it does more than just provide shade in the summer and pretty colors in the fall. According to research by Wharton real estate professor Susan M. Wachter, it can bump up the price of a home by 10%.

Wachter, along with former Wharton professor Grace Wong Bucchianeri, reported that fact in their paper, “What Is a Tree Worth? Green-City Strategies, Signaling and Housing Prices,” published in the journal Real Estate Economics. By examining data from two Philadelphia tree-planting programs between 1998 and 2003, they found a 7% to 11% price increase in homes sold that were within 1,000 feet of a planted tree. They also found diminishing benefits to homes sold as far away as 4,000 feet from groupings of new tree plantings, or about eight city blocks.

“There’s a science literature about the impact of trees on quality of life in cities — they help to keep water clean, air clean and they have microclimate effects. But before this work, little was known about the economic impact of trees in urban areas, particularly in neighborhoods that have been in decline,” Wachter says.

One of the tree planting initiatives used in the research, run by the Philadelphia Horticultural Society, was targeted at low-income neighborhoods and required block-level buy-in from residents, who jointly requested trees and agreed to care for them. The other, run by the Fairmount Park Commission, was based on individual requests and not targeted to specific neighborhoods or socioeconomic groups. Although the data in the low-income neighborhood did not show price increases with sufficient statistical power, homes in the park commission program showed about the same price increase as adding a garage to a home (which is worth 10 percentage points).

The research determined that the actual value of the tree itself was worth about two percentage points of a home’s increased sales price, which Wachter and Bucchianeri determined by measuring the price differentials between houses 100 feet from a tree (basically, houses with a tree directly in front of them) and those 1,000 feet away. The rest of the increase suggests that the bulk of the tree’s value lies in its physical and social capital and its ability to send positive signals to would-be residents about the area’s attractiveness as a place to live.

According to the Pennsylvania Horticultural Society, the research has been used to inform municipal tree planting programs.

“For most people, if you want a tree, you go buy a tree; you plant it, it’s done,” she notes. “People like trees — real estate developers landscape their new developments. But trees in an urban setting are different. The benefits of providing trees go beyond the gains to the individual homeowner. Trees in cities, particularly those that have over time lost their tree canopy, provide benefits not only to the tree planter but to neighbors as well.”

Since the research paper was published, the Pennsylvania Horticulture Society reports that the idea of bringing trees and parks back and creating walkable spaces in cities has caught on. Although it may not be a top-tier municipal request — crime and education usually take those spots — creating attractive neighborhoods has been shown to be factor in the health of families.

Wachter adds that she has seen her research results used to bolster tree planting initiatives similar to the Philadelphia programs she studied. “If it was simple, people would go out and do it. If you invest in trees, the return on investment appears to be high in distressed urban neighborhoods” she says. “The high returns suggests there are coordination difficulties in this investment process and that it can still be a battle to bring a tree to a concrete jungle.”

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