A new study shows that SRI activism pays for companies that lead in CSR.
By Hank Boerner
Here’s a question: does sustainability and corporate responsibility disclosure and reporting matter to investors?
We’re approaching the quarter-century mark now since the question has been raised in various settings and circumstances. Who does it matter to…and as a corporate manager, why should I care. Yes, there are still discussions like that in the corporate setting. Not everyone has gotten the message.
Since the early years of this new century, the questions have been answered by a steady stream of papers and books on CSR. The recent views of Harvard professor Bob Eccles on integrated reporting – explained in his book, One Report: Integrated Reporting for a Sustainable Strategy -- could exponentially increase the focus on CSR and related disclosure. Eccles sets out his theory about CSR:
Integrated Reporting is the publication in a single document of the material measures of financial and non-financial performance and the relationships between them.
This work promises to take the discussions of CSR into many more board rooms and C-suites for serious consideration.
Where CSR Reporting Comes From: Sarbanes-Oxley
We’ve come a long way in the past 25 years or more in terms of the recognition of business social responsibility. Still, there are skeptics in Corporate America. While half of the S&P 500 companies publish CSR or sustainability reports, half do not!
What do managers of the reporting companies know?
Think about what was going on just a decade ago. As our new century began, in late 2001 the 7th largest company on the Fortune 500 list – Enron – was collapsing in a self-inflicted mess of cooked books. To his credit, President George W. Bush instituted corporate governance reforms, calling attention to them in his January 2002 State of Union address to the nation. Shortly after, another unwelcome surprise: WorldCom filed its bankruptcy papers --- the largest in corporate history until that point. Many congressional districts experienced the pain of corporate governance failures.
The bill of Senator Paul Sarbanes (D-Md) was taken up by the House Republicans and Rep. Mike Oxley (R-Oh) signed on as co-sponsor; many of the Bush Administration proposals (such as CEOs and CFOs personally signing on to the financial reporting) became part of the landmark legislation we know as Sarbanes-Oxley, signed into law at the end of July 2002 by the president.
A year of intense rule making began. This was the legislation that would bring dramatic reforms to the boardroom and C-suite. We all hoped.
The Birth of ESG Reporting
There was a solid corporate governance reform movement well underway at least a decade earlier, mostly within the province of the regulators, lawyers and academics. As activist investors addressed the wrongs and shortcomings they saw in corporate behavior, the long-term environmental and social issue advocates began to join forces with governance advocates, and more frequently “E’ and “S” issues were paired with the “G” issues. A poor record on environmental management pointed to poor governance in the boardroom and the office of the CEO.
And so emerged in the early 2000’s decade the “ESG” framework, with investor advocates more closely examining the environmental, social issue and corporate governance policies, strategies, practices and performance of the companies held in portfolio. The GRI framework for ESG reporting emerged as Enron was imploding, building on the earlier CERES Principles.
New Study Shows CSR Activism Creates Shareholder Value
Today: The latest proof of concept is at hand for CSR professionals.
A recent study by three leading academics tied positive capital markets performance to CSR efforts at major U.S. companies. Looking at private data for a 10-year period (taking us back to the days when numerous corporate accounting scandals were about to make headlines), the trio examined “highly-intensive” shareholder engagements from 1999 to 2009.
The researchers were Elroy Dimson, emeritus professor of finance at the London Business School; Oguzhan Karakas, assistant professor, Carroll School of Management, Boston College; and Xi Li, assistant professor, Fox School of Business, Temple University. The trio just received the prestigious Moskowitz Prize for Socially Responsible Investing for their work.
Their findings suggest that CSR activism does create shareholder value; the average excess (or “abnormal” or “alpha”) return for the year after engagement was 1.8 percent. The range was 4.4 percent gain for successful engagements and zero market reaction for unsuccessful attempts at investor-company engagements.
Socially Responsible Investor Actions That Create Value
What themes were prominent in the actions of the SR investor activists? Corporate governance and climate change brought about the most success in investor engagements.
And companies with a higher capacity to implement important CSR changes were more likely to be targets of activists, and subsequently were more successful in working toward the issues in focus in the SRI activism to enact change. Those companies subsequently also enjoyed improvements in their operating performance, profitability, efficiencies, and in their governance ratings/rankings after their successful engagements.
So the next time you are asked “who cares about CSR or SRI” by corporate executives at the water cooler or online say this: Investors and stakeholders care. And the leaders of the best in class in CSR well understand the positive impacts on their organizations.
And hand them a copy of the 40-page Active Ownership study.
The Share Price-based Business Case for Sustainability