What’s the opposite of the Socially Responsible Investing Stock?
investing in companies producing mutual destruction weapons….
Responsibility Is Still Good For Business
By Christopher Flavelle
Sunday, February 15, 2009; F01
For American companies, the theme of the moment is retrenchment: From
canceled parties to wide-scale layoffs, the question of necessity is
the new standard of corporate decision-making. Does that mean that the
corporate social responsibility movement — which has burgeoned in
recent years — will be jettisoned for the bottom line?
The definition of CSR is ambiguous, but at a minimum it suggests that
a company has obligations beyond the requirements of the law to those
who are neither its shareholders nor its customers. That idea does not
seem controversial today, but as Geoffrey Heal, a professor at
Columbia Business School, notes in his book "When Principles Pay,"
less than 40 years ago, Milton Friedman argued that the sole
responsibility of business was to increase profits, creating jobs and
wealth in the process — and most people in business seemed to agree.
Friedman’s argument — which, Heal writes, follows from Adam Smith’s
idea of the invisible hand — seems especially relevant today. At a
time when so many American companies are unable to generate a profit,
and many more are forced to lay off workers, is it reasonable to ask
those companies to devote their energy toward anything other than the
bottom line? Is it good for them if they do?
"Since the concept of CSR became popular, there’s never been a
recession like the one we’re going into right now," Heal says.
"Profits are going to be very hard to come by for many corporations.
If they see CSR as contributing to their bottom line, they’ll continue
to act responsibly. If they see CSR as a kind of a PR campaign,
they’ll probably cut back on it."
There’s the rub: Is CSR, as critics variously suggest, an insurance
policy for image-sensitive chief executives and a barrier to
innovation? Is it, as Friedman himself put it in his book "Capitalism
and Freedom," a "fundamentally subversive doctrine"? Or does CSR
actually contribute to a company’s bottom line?
We decided on a simple test. The Big Money features an interactive
tool called the Socially Responsible Investing Stock Screener (http://
www.thebigmoney.com/tools/socially-responsible-investing), which ranks
500 of the nation’s largest companies according to five categories of
behavior: gay and lesbian rights; environmental practices; labor and
human rights; whether the company sells military equipment and
weapons; and a category called "vice," which covers everything from
alcohol and tobacco to gambling and pornography.
Proponents of corporate responsibility argue that how a company
behaves affects more than just the community around it; good behavior
is also good for the bottom line. For example, in July 2007, Goldman
Sachs published a study finding that sustainable companies
outperformed the market, often by significant margins. We decided to
test that argument by using the SRI Stock Screener and selecting each
of the five available criteria, creating a ranked list of 498
companies that represented — according to IW Financial, the company
that compiles the rankings — a broad view of socially responsible
behavior.
We took the 100 most responsible companies and the 100 least
responsible and randomly selected a sample of 25 from within each
group. For each of those companies, we compared the stock price on
Feb. 11, 2008, before the worst of the economic crisis, and 12 months
later, on Feb. 10, 2009. Then, for each of those two groups of 25, we
calculated the average change in stock price. Had one group been
harder hit by the downturn?
It seemed reasonable to expect that, on average, companies with less
compunction about their behavior would be better able to weather the
downturn, by cutting costs more quickly or by spending less on feel-
good environmental programs. That expectation was wrong.
Based on our samples, from February 2008 to February 2009, the stock
price of both the more responsible and less responsible companies fell
by approximately the same amount — about 37 percent. (In fact, the
stock price of the more responsible companies fell by 1.4 percentage
points less than the price of the less responsible companies, but that
difference isn’t statistically significant for a total sample size of
50 companies.) In the worst economic turmoil in decades, when
investors had every reason to shed pretensions of political
correctness, companies that put time and energy into behaving
responsibly seem, thus far anyway, to have performed no worse than
those that didn’t.
Unsurprisingly, a number of CSR fund managers insist that responsible
behavior helps companies’ performance and that a significant
differential becomes visible over time. Joe Keefe, the president and
chief executive of Pax World Funds, a sustainable-investment fund in
Portsmouth, N.H., says that over the long term, say three to five
years, companies with better environmental, social, and governance
practices tend to have lower risk and smarter management than
companies that don’t.
"This isn’t just a small group of tree-huggers on the left," says
Keefe. "We think these types of investments are smart investments."
That view is echoed by Mark Bateman, IW Financial’s director of
research, who cites a recent PricewaterhouseCoopers report that found
companies that report sustainability data get better returns on assets
than those that don’t.
Fair enough. But people such as Keefe and Bateman are bound to support
the logic of CSR, which reflects the mandate of their companies. What
about the companies at the bottom of the list? We called the three
companies that ranked lowest on the list — Eastman Chemical, Lockheed
Martin, and ExxonMobil — to see what they thought about CSR. You
might think they would agree with Friedman that a company’s first duty
is to its shareholders, especially during a downturn. But they turned
out to be less interested in talking about the limitations of
corporate responsibility than explaining what they were doing to
achieve it.
We started with Eastman Chemical, which ranks 496 out of 498
companies. "I’m surprised to hear we’re at the bottom of the list,"
said company spokeswoman Wanda Valentine, who noted that Eastman had
just hired a vice president for sustainability and that the company
intends to honor all its philanthropic commitments despite the
downturn.
Lockheed Martin, company No. 497 of 498, objected even more adamantly.
Scott Lusk, a company spokesman, noted that Lockheed Martin employees
have logged some 5 million volunteer hours since 2002 and make $17
million in charitable donations each year. "I think those facts speak
for themselves," said Lusk.
But none of the companies was more thorough in listing its CSR bona
fides than ExxonMobil, which ranked 498th of the 498 on the list.
Spokesman Rob Young provided a long list of the company’s good deeds,
from reducing its greenhouse gas emissions and instituting a "global
diversity framework" for its work force to transparency agreements
with countries where ExxonMobil operates, such as Chad and Nigeria. On
the day we spoke, a company called Medicines for Malaria Venture
announced a new pediatric drug to fight malaria — thanks in part to
$1.5 million in funding from ExxonMobil.
On one level, the comments from these companies illustrate the
ambiguity of what, exactly, constitutes corporate responsibility.
Bateman, of IW Financial, says an important distinction in measuring
CSR was whether to include philanthropy as a criterion. (The Big
Money’s SRI Stock Scanner does not.) He says philanthropy can be
difficult to measure consistently across companies and says that,
unlike measuring how companies behave in their day-to-day operations,
philanthropy can sometimes serve to "greenwash" bad behavior while
diverting profits that shareholders could otherwise choose to donate
to their own preferred causes.
However you define CSR, and whether you agree with the financial
arguments in favor of it, as a cultural phenomenon the idea seems to
have some staying power. Suppose that IW Financial’s criteria are
reasonable, that its data are accurate, and that Eastman, Lockheed
Martin, and ExxonMobil really are the least socially responsible large
companies in America. What does that say about their arguments to the
contrary? Since their products are in demand whatever the state of the
economy, these companies are largely shielded from the vicissitudes of
consumer taste; if any company were willing to challenge the demands
of CSR, and echo the arguments of Milton Friedman, it should be them.
Instead, their unwillingness to do so can mean only one thing: That
whatever these companies actually think about the norms entailed in
CSR, they’ve decided they have no choice but to play along, recession
or no recession. Call it lip service if you like, but that’s the way
behavior changes: Step one is getting everybody to agree to the rules,
and step two is getting everybody to follow them. If CSR proponents
can hold on to step one through this downturn, reaching step two can’t
be far behind.
The Big Money is a financial news and analysis Web site from the Slate
Group. It thanks Alex Acs, a graduate student in policy analysis at
Columbia University’s School of International and Public Affairs, for
his statistical analysis of the performance of companies on the SRI
Stock Screener.
