Shareholders and Standards The Value Puzzle of

Corporate Social Responsibility

Joanne Yoong3/5/2005

A New Public Role for Firms?• Appeal to private sector role in development initiatives

– Supplement to government/NGO activity• Growing concern for “responsible” business

– Environmental / corporate governance scandals– Pressure from shareholders / regulators– Greater media focus

• How important is social responsibility to firms?

Central or Important

Not Important

Not Considered

2000 (est) 2005

55% 88%

Economist Intelligence Unit survey of global CEOs, 2005

A (very) simplified world…

Firm

Shareholders

Employees

Managers

Customers

Suppliers

Community Environment

Regulator

Stakeholder

Advocate

Profit-maximizing: present/future consumer demand,

reputation, morale, risk-managing

Profit-redistributing: advocate/regulator demands, managerial agency

Why

CSR ?

Voluntary Standards : FTSE4Good

• One of 2 leading UK CSR indexes, incepted 09/01– Owned by FT group, open to all FTSE All-Share members

• 702 firms, 98% of UK market capitalization• 296 firms in FTSE4Good

• Inclusion/Exclusion Process– Environmental, human rights, employee relations, and

global supply-chain standards– Reviews and verification by independent 3rd party– Additions/deletions publicly announced semi-annually

• “Win-win” vision claimed by FTSE : increase in firm value– Brand-equity, reputation, signalling, cost-savings– Supported by large but problematic empirical literature

• Overwhelmingly +ve link between CSR and financial performance

Event Study of Addition/Deletion

• Focus on firms added/deleted after inception – Collected from releases– Removed confounding events, insufficient data– Sample size: 93 additions, 19 deletions (12/01 – 12/04)

• Standard-event study methodology– Estimation window: 250 trading days – Event window: 1,3,5 days around event– Compute cumulative abnormal returns for each stock

• Mean-adjusted return• Market-adjusted return (relative to FTSE All-Share)• CAPM model returns (relative to FTSE All-Share)

No Strategic Case for Adoption

0.260.11%CAPM

-0.44-0.27%Market-adjusted

0.760.40%Mean-adjusted

Event Window: (-5 to +5 days)

1.280.53%CAPM

1.110.67%Market-adjusted

1.030.54%Mean-adjusted

Event Window: (-3 to +3 days)

1.040.43%CAPM

0.630.38%Market-adjusted

0.890.47%Mean-adjusted

Event Window: 0 days

Brown-Warner statistic

Cumulative Abnormal ReturnDeletions from Index

No Strategic Case for Adoption

-4.64-1.74%CAPM

-2.70-1.18%Market-adjusted

-4.72-2.24%Mean-adjusted

Event Window: (-5 to +5 days)

-3.21-1.21%CAPM

-1.820.80%Market-adjusted

-3.82-1.81%Mean-adjusted

Event Window: (-3 to +3 days)

-0.59-0.22%CAPM

0.450.20%Market-adjusted

-1.18-0.56%Mean-adjusted

Event Window: 0 days

Brown-Warner statistic

Cumulative Abnormal

ReturnAddition to Index

But Membership Keeps Rising...

0

20

40

60

80

100

120

3/02 9/02 3/03 9/03 3/04 9/04

Net Addition to Membership Gross Addition to Membership

Implications• No “happy convergence between what your shareholders want and

what is best for millions of people the world over”– On average, divergence is not resolved in favor of shareholders – Net impact from redistribution hurts shareholders

• No implication for overall welfare gains

• But firms continue to participate in CSR initiatives for other motives– Theory suggests political economy, agency problems

• Preempt future regulation by appeasing stakeholders/regulators• Quality leaders adopt low standards, affect future “best practices”• Managers set their own agendas separately

– Consistent with current environment• Increasing legislation and standardization, e.g. ISO standard• Initiatives by international bodies e.g. Global Compact• FTSE member CEOs see CSR mandate as “part of core values”

• “Value-puzzle” in fact promises possibilities beyond “win-win” vision