I Want The World to Know TV

1 University of California at Berkeley ABSTRACT The field of corporate social responsibi lity (CSR) has grown exponentially in the last decade. Nevertheless, th ere remains a protracted debate about the legitimacy and value of corporate responses to CSR concerns. There are different views of the role of the The field of corporate soci al responsibility has grow n exponentially in the last decade. More than half of the Fortune 1000 companies issue corporate social A larger number of companies than at any time previous are engaged in a serious effort to define a nd integrate CSR into all aspects of their businesses. An increasing number of sharehol ors, activists, labor unions, employees, community organizations, and news media are asking companies to progressive the company is in engaging CS R. Some companies focus on a single area, which is regarded as the most important for them or where they have the highest impact or vulnerability—human rights, for example, or the environment—while others aim to integrate CSR in all aspects of their opera tions. For successful implementation, it is crucial that the CSR principles are part of the cor porations values and and that both management and employees are committed to them. Furthermore, it is important that the CSR strategy is aligned with the company’s specific corporate According to Friedman (1970), in a free so environmentally friendly equipment, the ch ange of management structures, or the implementation of stricter quality controls . Since being socially responsible involves costs, it should generate benefits as well in order to be a sustaina ble business practice. A a policy that constantly ge nerates negative cash flows. The shareholders invest their money in a co businesses should have more st able earnings growth and less downside volatility. Since companies that adopt the CSR principles carry less risk, when valuing those companies, a lower discount rate should be used. In the company valuation this lower tail risk should There are also other cases in which doi ng what is good and responsible converges with doing the best for the particular busines s. Some CSR initiatives can dramatically reduce operating costs. For example, reducing packaging material or planning the optimum route for delivery trucks not onl y reduces the environmental impact of a company’s operation, but it also reduces th e cost. The process of adopting the CSR principles motivates executives to reconsider their business practices and to seek more Companies perceived to have a strong CS R commitment often have an increased As mentioned earlier, although it is rather straightforward to identify the above benefits as being socially res ponsible for businesses, it is an arduous task to quantify and measure them. Since CSR is integrated into the business practices, it is by definition complicated to try to measure its effects sepa rately. Ideally, it should be possible to keep all other factors constant and measure a co mpany’s financial performance and volatility of cash flows before and after adopting the CSR principles. As this is not possible, however, empirical methods are used to id correlation between social res ponsibility and accounting perfor mance after controlling for subjective bias. Still other studies use survey instruments (Aupperle, 1991) or behavioral and perceptual measures (Wokutch and Mc Kinney, 1991). Waddock and Graves (1997) drew upon the Kinder Lydenberg Domini (KLD) rating system, where each company in the S& P 500 is rated on multiple attributes co nsidered relevant to CSP. KLD uses a combination of surveys: fina ncial statements, artic les on companies in the popular press, academic journals (especially law journals), and government reports in order to assess CSP along eleven dimensions . Based on this information, KLD constructed the Domini 400 Social Index (DSI 400), the functional eq uivalent of the Sta ndard and Poors 500 Index, for socially responsible firms. Measures of Financial Performance Although measuring financial performance is considered a si mpler task, it also has it specific complications. Here, too, there is little consensus about which measurement instrument to apply. Many resear evaluation of the ability of a firm to generate future econom ic earnings (McGuire, J. B., A. Sundgren, and T. Schneeweis, 1988). But 12 variables. The segmentation of the industrie s conforms to that described by Waddock and Table 1. Industries in the sample Mining, Construction 100-1999 21 7.6 pparel 2000-2390 20 10.22 Forest products, paper, publishing 2391-2780 23 10.04 Chemicals, pharmaceuticals 2781-2890 32 10.27 Refining, rubber, plastic 2891-3199 13 8.15 Containers, steel, heavy mfg. 3200-3569 25 9.5 Computers, autos, aerospace 3570-3990 78 9.93 Transportation 3991-4731 9 8.77 Telephone, utilities 4732-4991 45 8.18 Wholesale, retail 4992-5990 47 9.8 Bank, financial services 6150-6700 72 10.7 Hotel, entertainment 6800-8051 32 10.19 Hospital management 8052-8744 5 9.5 ANALYSIS A total of 422 companies remained in th e sample after companies missing either financial or CSP data were eliminated. Tabl e 1 demonstrates the average KLD score for each industry. Higher scores indi participation in Domini 400 Social Index are us ptive statistics for Table 2. Descriptive Statistics for years 1996-2000 Table 3 provides the correlation matrices 2000. KLD scores and Domini i ndex participation are strongly correlated with p0.001. Note that both the KLD scores for the companies and the dummy variable for the participation in the Domini 400 Social Inde gnificantly correlated with all three measures of financia l performance (ROA, ROE, ROS) at p Domini 0.495*** 0.114*** 0.087*** 0.041+ 0.012+ 0.114*** 0.103*** 0.043* 0.559*** 0.025+ -0.12*** -0.09*** -0.37*** 0.059*** -0.18*** 0.35*** 0.226*** 0.1 ; * p 0.05 ; ** p 0.01; *** p 0.001 The probability that a variate would assume a value greater than or equal to the observed value strictly by observed Cross-sectional time series regression anal ysis was used to test our hypotheses using financial performance as the dependent va riable and controlling for size, debt level, and industry. In all models, CSR is the ke y dependent variable and the measurement of the other independent variables varies. Tabl e 4 presents the results of the regression analysis using financial performance as the dependent variable a nd the dummy variable for Domini Index participation as independent variable. In the first model, the logarithm ROA 0.74 24.84 13.97 ROE 1.82 8.27 2.44 0.001) ROE 1.22 8.21 2.44 0.001) 1996-2000 Log of sales used as proxy for size ROS 0.58 11.24 5.46 0.001) Each of the models is significant at (p 0.001). When ROA and ROS are used as dependent variables, they seem to be related to Domini participation at p 0.10. The is used as a measure of The dummy variable for Domini Index participation is a proxy of the CSR performance, but it does not yield any info rmation concerning the individual CSR score of each company. Thus, in our second analysis, we use the Kinder Lydenberg Domini (KLD) rating system as a measure of CSR. ession analysis using financial performance as the dependent variable and the KLD soci al responsibility score as the independent variable. In the first model, th ROA 1.12 0.05) 24.9 13.96 0.001) ROE 0.99 0.1) 8.91 2.66 0.001) ROE 1.00 0.05) 8.97 2.68 0.001) 1996-2000 Log of sales used as proxy for size ROS 0.61 0.05) 15.88 5.52 0.01) In general, the results are stronger when the KLD scores are used as a measure of CSR, rather than when the Domini Index pa rticipation is used. In both cases, however, Arguments exist that support the view th at firms which have solid financial performance have more resources available to invest in social performance domains, such as employee relations, environmental concer ns, or community relations. Financially strong companies can afford to invest in wa ys that have a more long-term strategic impact, such as providing services for the community and their employees. Those allocations may be strategically linked FUTURE RESEARCH Future research in this area could proceed in a number of directions. First, more extensive studies are needed to explore the causal mechanisms linking CSR to profitability and to determin REFERENCES and firm financial performance.” Academy of Management Journal McWilliams, A., and D. Siegel (2000) “Corpor ate social responsibility and financial performance: Correlation or misspecification?”