Stakeholder Relations and Financial Performance

Sustainable Development Sust. Dev. 16, 213232 (2008) Published online in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/sd.
364
Stakeholder Relations and Financial Performance

Bert Scholtens* and Yangqin Zhou Department of Finance, University of Groningen, Groningen, The Netherlands
ABSTRACT We analyze how shareholder performance can be associated with stakeholder relations. As such, we try to nd out whether there is an association between nancial performance and stakeholder relations with respect to different theoretical notions about the rm. Financial performance is operationalized as the nancial return of a rms shares. For stakeholder relations, we look into community involvement, corporate governance, employee relations, environmental conduct, diversity of the workforce, human rights policies and product attributes. We nd that the different components of stakeholder relations appear to be associated in a complex manner with shareholder performance. Therefore, it adds value to look closely into the details of stakeholder relations in connection with nancial performance. Copyright 2008 John Wiley & Sons, Ltd and ERP Environment.
Received 30 August 2007; revised 20 November 2007; accepted 28 November 2007 Keywords: nancial performance; corporate social responsibility; stakeholder management; risk; return; theory of the rm
Introduction
TTENTION FOR CORPORATE SOCIAL RESPONSIBILITY HAS INCREASED SIGNIFICANTLY DURING THE LAST
decade. Many studies investigate the connection between nancial and social performance: does behaving in a socially responsible manner matter for the value of the rm? Numerous theoretical views on the links between nancial and social performance have been expressed (for an overview see Allouche and Laroche, 2006). Furthermore, a large number of empirical studies investigate the relationship between social and nancial performance (see Orlitzky et al., 2003). Not surprisingly, there are different opinions about the interaction between nancial and social performance and the empirical research has not arrived at a consensus (see Lockett et al., 2006). First, there is the liberal view that there is a negative link as social responsibility involves costs and therefore worsens a rms competitive position (Friedman, 1970). Related is the view that social constraints on rms and socially responsible behavior may conict with value maximization (Brummer, 1991; Jensen, 2001). There will also be a negative link between social and nancial performance when managers pursue their own objectives, which may conict with shareholder and stakeholder objectives (Williamson, 1964; Jensen and Meckling, 1976). Sethi (1979) argues that rms may even put social responsibility over
* Correspondence to: Bert Scholtens, Department of Finance, University of Groningen, PO Box 800, 9700 AV Groningen, The Netherlands. E-mail: l.j.r.scholtens@rug.nl
Copyright 2008 John Wiley & Sons, Ltd and ERP Environment
214
B. Scholtens and Y. Zhou
nancial performance in a quest for legitimacy and when they are under pressure from shareholders. Preston and OBannon (1997) argue that an accrual of funds to invest in social performance can lead to poorer nancial performance due to negative synergy. Alternatively, the market equilibrium might cancel out the costs of corporate socially responsible behavior (McWilliams and Siegel, 2001). In this respect, satisfying stakeholders interests may result in an improvement of the rms nancial and economic performance (Freeman, 1984). Or there can be positive synergy when strong social performance leads to improved nancial performance (Porter and Van der Linde, 1995). However, McGuire et al. (1988) nd that a rms prior nancial performance conditions corporate social responsibility more than its subsequent nancial performance. McWilliams and Siegel (2001) argue that rms invest in social activities because they want to satisfy the demands of their stakeholders. In market equilibrium, the costs and the benets of socially responsible conduct will compensate each other. This is the basis for a neutral interaction between nancial and social performance. Margolis and Walsh (2001) offer an excellent overview of the numerous empirical studies of the relationship between social and nancial performance. They nd that corporate social performance is treated as an independent variable in most of the studies. This variable is used to predict or precede nancial performance. Approximately 50% of the studies found a positive relationship between the two, 25% found no relationship, 20% had mixed results and 5% had a negative relationship. A minority of the studies treated corporate social performance as the dependent variable. In two-thirds of these there was a positive relationship between social and nancial performance. Margolis and Walsh (2001) were very cautious in deriving conclusions from their overview. This is because there are serious methodological concerns about many of the studies. Their main criticism is with respect to the measurement of corporate social responsibility, the wide diversity of measures used to assess nancial performance and the direction and mechanisms of causation. Furthermore, Orlitzky et al. (2003) performed a meta-analysis. They found that the relationship between social and nancial performance is positive in a wide variety of contexts and sectors but also that residual variance usually is substantial. The connection between social and nancial performance plays an important role in the analysis of socially responsible investing (SRI) too. From a portfolio perspective, SRI eliminates securities from the universe of allowable assets. Consequently, SRI would reduce the potential for diversication. This has been studied, among others, by Bauer et al. (2005) and Bello (2005). They nd that the risk and return attributes of these screened SRI portfolios do not signicantly differ from their conventional counterparts. Geczy et al. (2005) nd that the cost of SRI depends on the perspective of the investors. Socially responsible investors who do not believe in the ability of mutual funds to outperform the market in terms of the capital asset pricing model do not face a signicant opportunity loss from investing in SRI mutual funds. However, an investor believing in a world consistent with the FamaFrench (1992) threefactor model may face an opportunity loss of approximately 30 basis points per month (Gezcy et al., 2005). Most of the empirical literature on SRI reports little difference between the risk-adjusted returns of stocks with high scores on SRI and those with low scores. Kurtz (1997) establishes that socially responsible stocks do not appear to underperform the market as a whole and Statman (2000) nds this for SRI mutual funds. This is reestablished elsewhere in the literature too (e.g. Bauer et al., 2005; Derwall et al., 2005; Becchetti and Ciciretti, 2006; Lee and Faff, 2006; Statman, 2006) and it appears safe to conclude that there are no statistically signicant differences in the performance of socially responsible funds and stocks and conventional ones. However, Hong and Kacperzcyk (2007) report higher expected returns for stocks that are excluded from a portfolio because of negative ethical issues (companies producing alcohol, tobacco and gambling). Brammer et al. (2006) nd that their composite SRI indicator is negatively related to UK stock returns. In this paper, we explicitly address the association between nancial market return and risk of the rm and its stakeholder relations. In this respect, taking account of risk is an ingredient that is new
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd
215
compared with the existing literature. Furthermore, in contrast to most of the research mentioned, we specically look into the various constituting dimensions of stakeholder relations or corporate social responsibility, and not only into a composite measure. We use a database with US rms from Kinder, Domini and Lydenberg that takes account of the multidimensional aspects of the notion of stakeholder relations (see Sharfman, 1996, for an assessment of the construction of the KLD database) and we assess a period in which the stock market showed much volatility. We investigate the trade-offs between nancial and social performance as well as the downside (risk and bad social performance). The structure of the paper is as follows. First, we go into the theoretical background of shareholder performance and stakeholder relations and discuss potential linkages. Second, we introduce the data and methods employed in this study. In the fourth section, we report our results. We end with a conclusion and discussion of our ndings in connection with previous research and we will derive some implications for rm management.
Background
Shareholder management aims at maximizing the returns to the owners of the shares of the rm. The rationale for this type of management is in the classical economic paradigm that the aim of the rm is to maximize prots. In this perspective, the rm is a money machine. Others regard the rm as a social construct. Here, apart from shareholders, the rm has to serve the interests of other stakeholders too (Berle and Means, 1932). Because of institutions and market imperfections such as incomplete and asymmetric information, market power etc., the interests of the shareholder are not fully identical with those of other stakeholders and there even may be conicts of interest among the stakeholders (Jensen, 2001; Tirole, 2001). Firms face a trade-off between various aspects of social responsibility and nancial performance. They incur costs from actions that benet stakeholders that put them at an economic disadvantage compared with rms that do not respond in a positive manner to the claims of these stakeholders (Ullmann, 1985). These costs may result from actions such as making charitable contributions, complying with extensive environmental regulation or labor safety requirements, and establishing good relations with the community and NGOs (McWilliams and Siegel, 2001). Furthermore, concern with various stakeholder interests may distract the rms focus from prot making and limit the rms strategic alternatives. A contrasting perspective is put forward by Moskowitz (1972). He claims that the explicit costs to a rm of behaving in the interests of its stakeholders are minimal. According to Moskowitz, rms may benet from socially responsible actions in terms of employee morale and productivity as well as customer goodwill. Hillman and Keim (2001) point out that socially responsible behavior may also improve a rms relationship with bankers, investors and government ofcials. A third and intermediate view is that the costs of socially responsible actions are signicant but are offset by an accompanying reduction in other rm costs. Cornell and Shapiro (1987) suggest that a rm must satisfy parties with both explicit and implicit contracts (see also McWilliams and Siegel, 2000). Implicit claims such as product quality are less costly to a rm than explicit claims such as wage contracts or dividends and interest rate payments (McGuire et al., 1988). If implicit contracts are not served properly, parties to these contracts concerning social responsibility of the rm may attempt to transform them into (more costly) explicit contracts. Also, there may be spillover effects to other stakeholders if the rm does not honor the (implicit) contract with one particular stakeholder. Traditional nance theory suggests that there is a direct and positive relation between nancial risk and return (Elton et al., 2003). We are interested in the downside of the interaction between stakeholder relations and nancial performance. Alexander and Bucholtz (1978) argue that investors will consider
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd
216
less socially responsible rms to be riskier investments, because they see management skills at the rm as low. Poor social responsibility may make it more difcult for a rm to obtain external nance and skilled and well-motivated employees. Then, low levels of social responsibility or poor stakeholder relations may be associated with high nancial risk of the rm. With high levels of responsibility or good stakeholder relations, rms may face less nancial risk because they will experience more stable relations with the government and the nancial community (McGuire et al., 1988). So far, the association between poor stakeholder relations (stakeholder concerns) and risk has not been empirically investigated in a systematic manner, i.e. including all key stakeholders. We want to test how nancial return and stakeholder relations (both aggregated and disaggregated) are to be associated. Furthermore, we are interested in the relationship between nancial risk (volatility of the returns) and stakeholder relations. On the basis of the literature discussed, we come up with the following hypotheses. H1. There is a signicant association between nancial return and stakeholder relations. H2. There is a signicant association between nancial risk and stakeholder relations. The null hypothesis in both instances is that there is no signicant association between nancial performance (either risk or return) and stakeholder relations (either strengths or concerns).
Data and Method

Data In order to associate stakeholder relations and nancial performance, we need data about how rms interact with their stakeholders as well about nancial risk and return of the rm. As to stakeholder relations, we obtained data about US rms from KLD Research and Analytics, Inc. on social criteria for including and excluding stocks from a portfolio (KLD, 2003). KLD provides us with a database that allows for time-series analysis for more than ten years. Most other social performance ratings have a much shorter history. KLD data are also used by Waddock and Graves (1997), McWilliams and Siegel (2000), Hillman and Keim (2001) and Chatterji et al. (2007). KLD uses screens to monitor corporate social performance (see Sharfman, 1996, for an assessment of data validity). Positive screens indicate strengths of a rm and negative screens indicate weaknesses or concerns of the rm. Each screen can be summarized in a binary variable, which reects whether the rm meets the particular criterion. The screens are summarized in groups of corresponding items referring to a general theme. Seven themes are identied: community, corporate governance, diversity, employee relations, environment, human rights and product. In the appendix, we give a detailed description of the elements that constitute the strengths and concerns of the themes. Please take note of the fact that these themes all are of a very different nature and, as such, we have screens that relate to different dimensions. Financial data are taken from Thomsons Datastream, which is a commercial data provider. We selected rms that were monitored for the full period for which we had data. We investigate a period of 14 years (19912004), which covers two full business cycles. KLD starts its observations in 1991. When relating nancial risk and return to stakeholder relations, we use a time-lag of one year because KLD data about a rms stakeholder relations in a particular year are available in February of the next year. Given data availability, we end up with 295 rms or 4130 rm years. Next, we linked these rms to stock market return, the market-to-book-ratio and the market capitalization of the rm in each year. We were not able to nd a match between the KLD data and Datastream for six rms. This left us with 289 rms and 4046 rm years. During the 14 years of observation, we could not trace back the
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd
217
data in Datastream for the whole time span. This resulted in a loss of some additional rm years. Table 1 has the descriptive statistics of the key variables and the stakeholder attributes. It appears (see Table 2) that nancial return is slightly positively correlated with nancial risks. This is consistent with the notion that a highly volatile stock should be compensated with a higher return. The descriptive statistics show that the distribution of nancial return and nancial risk are highly asymmetric. This is usually the case with these data. Furthermore, we nd that almost all stakeholder dimensions are imperfectly correlated with one another. This warrants taking account of the various dimensions in the remainder of the analysis. A forward-looking and market-based measure is used to dene nancial performance and nancial risk as the dependent variables. The nancial return is measured by the stock (equity) return earned by shareholders. Average monthly stock prices were collected from Datastream. We calculated rms rate of return for each month and took the average return for 12 months as one observation of nancial return. Financial risk is dened as the volatility of the stock prices, which is measured by the standard deviation of the monthly returns across one year. The explanatory variables are various corporate stakeholder strengths and concerns as well as the composite or overall strengths and concerns. Table 1 reveals that the mean ratings of stakeholder strengths and concerns are quite similar. From Table 2 we observe that the correlation between the two is positive and signicant. Stakeholder strengths are slightly negatively correlated with nancial return, but slightly positively with nancial risk. In our estimations, we control for rm size and two dummy variables, depending on whether rm is included in the Domini 400 Social Index (DSI) and the Standard and Poors 500 Index (S&P500). Firm size is dened as the logarithm of net sales. We investigated recent studies that use KLD as the measure of social performance (Waddock and Graves, 1997; Tsoutsoura, 2004; McWilliams and Siegel, 2000; McWilliams et al., 2005; Siegel and Vitaliano, 2006), and found that rm size has been consistently used as a control variable in these studies. Firm size
Denition FRETURN FRISK STRENGTHS CONCERNS LN_netsales COM_STR CGOV_STR DIV_STR EMP_STR ENV_STR PRO_STR HUM_STR COM_CON CGOV_CON DIV_CON EMP_CON ENV_CON PRO_CON HUM_CON Financial return Financial risk Corporate stakeholder strengths Corporate stakeholder concerns Logarithm of net sales Community strengths Corporate governance strengths Diversity strengths Employee relations strengths Environment strengths Product strengths Human rights strengths Community concerns Corporate governance concerns Diversity concerns Employee relations concerns Environment concerns Product concerns Human rights concerns
Mean 0.012 0.088 2.357 2.192 15.14 0.426 0.032 0.827 0.521 0.292 0.219 0.009 0.076 0.664 0.198 0.317 0.469 0.374 0.238
Std. dev. 0.024 0.044 2.283 2.306 1.355 0.740 0.183 1.204 0.750 0.567 0.439 0.096 0.273 0.667 0.407 0.559 0.942 0.714 0.477
Skewness 0.247 2.071 1.459 1.685 0.079 1.924 5.848 1.663 1.479 2.097 1.766 10.272 3.486 0.670 1.654 1.704 2.306 2.161 1.907
Kurtosis 5.496 13.00 5.682 6.574 3.033 6.758 38.752 5.664 5.096 7.813 5.224 106.509 14.443 3.073 4.175 5.646 8.371 7.823 6.249
Observations 4046 4046 4046 4046 3851 4046 868 4046 4046 4045 4045 868 4046 868 4046 4046 4045 4046 868
Table 1. Descriptive statistics The Appendix goes into the details of the denitions of the stakeholder variables.
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd
218
1 1. FRETURN 2. FRISK 3. STRENGTHS 4. CONCERNS 5. LOG_NET_SALE 6. DUMMY_DSI 7. DUMMY_S&P 8. CGOV_STR 9. CGOV_CON 10. COM_STR 11. COM_CON 12. DIV_STR 13. DIV_CON 14. EMP_STR 15. EMP_CON 16. ENV_STR 17. ENV_CON 18. HUM_STR 19. HUM_CON 20. PRO_STR 21. PRO_CON 1 0.049 (0.00) 0.037 (0.02) 0.057 (0.00) 0.032 (0.05) 0.030 (0.02) 0.039 (0.02) 0.040 (>0.20) 0.050 (0.20) 0.001 (>0.20) 0.063 (0.00) 0.044 (0.00) 0.022 (0.20) 0.035 (0.05) 0.003 (>0.20) 0.021 (0.20) 0.068 (0.00) 0.004 (>0.20) 0.115 (0.00) 0.019 (>0.20) 0.054 (0.00)
1 0.030 (0.10) 0.003 (>0.20) 0.026 (0.10) 0.074 (0.00) 0.039 (0.02) 0.042 (>0.20) 0.026 (>0.20) 0.076 (0.00) 0.015 (>0.20) 0.041 (0.00) 0.080 (0.00) 0.104 (0.00) 0.020 (>0.20) 0.045 (0.00) 0.088 (0.00) 0.052 (0.20) 0.008 (>0.20) 0.045 (0.00) 0.024 (0.20) 1 0.272 (0.00) 0.394 (0.00) 0.033 (0.02) 0.164 (0.00) 0.005 (>0.20) 0.359 (0.00) 0.582 (0.00) 0.159 (0.00) 0.789 (0.00) 0.058 (0.00) 0.563 (0.00) 0.070 (0.00) 0.466 (0.00) 0.145 (0.00) 0.149 (0.00) 0.075 (0.05) 0.378 (0.00) 0.266 (0.00) 1 0.564 (0.00) 0.541 (0.00) 0.310 (0.00) 0.103 (0.00) 0.548 (0.00) 0.065 (0.00) 0.458 (0.00) 0.277 (0.00) 0.217 (0.00) 0.155 (0.00) 0.489 (0.00) 0.233 (0.00) 0.734 (0.00) 0.065 (0.10) 0.391 (0.00) 0.017 (>0.20) 0.660 (0.00) 1 0.323 (0.00) 0.599 (0.00) 0.205 (0.00) 0.443 (0.00) 0.272 (0.00) 0.216 (0.00) 0.398 (0.00) 0.029 (0.10) 0.157 (0.00) 0.221 (0.00) 0.187 (0.00) 0.390 (0.00) 0.078 (0.05) 0.187 (0.00) 0.054 (0.00) 0.419 (0.00) 1 0.343 (0.00) 0.104 (0.00) 0.172 (0.00) 0.046 (0.00) 0.207 (0.00) 0.013 (>0.20) 0.020 (>0.20) 0.052 (0.00) 0.206 (0.00) 0.134 (0.00) 0.513 (0.00) 0.038 (>0.20) 0.211 (0.00) 0.082 (0.00) 0.292 (0.00) 1 0.218 (0.00) 0.398 (0.00) 0.178 (0.00) 0.115 (0.00) 0.206 (0.00) 0.089 (0.00) 0.053 (0.00) 0.109 (0.00) 0.007 (>0.20) 0.215 (0.00) 0.050 (0.20) 0.079 (0.02) 0.042 (0.00) 0.226 (0.00) 1 0.138 (0.00) 0.052 (0.20) 0.050 (0.20) 0.069 (0.05) 0.000 (>0.20) 0.006 (>0.20) 0.004 (>0.20) 0.049 (0.20) 0.071 (0.05) 0.017 (>0.20) 0.035 (>0.20) 0.002 (>0.20) 0.066 (0.10) 1 0.196 (0.00) 0.195 (0.00) 0.353 (0.00) 0.038 (>0.20) 0.201 (0.00) 0.129 (0.00) 0.155 (0.00) 0.208 (0.00) 0.103 (0.00) 0.122 (0.00) 0.101 (0.00) 0.377 (0.00)
Table 2. Correlation matrix between all variables Source: KLD rating data, 2003.
matters in determining the association between nancial and social performance, as small rms may not exhibit as much socially responsible behavior as large rms do (Waddock and Graves, 1997). We could not nd the net sales for some rms and years; therefore, the tests carrying control variables were constructed in an unbalanced panel. Firm size is negatively correlated with nancial return and nancial risk and positively with both overall stakeholder strengths and concerns. This suggests that large rms may not necessarily outperform their competitors by higher returns but that size does contribute to lower rm-level risk. In general, large rms are more likely to foster good relationships with stakeholders than small rms, but they also are more exposed to downside issues.
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd
219
10
11
12
13
14
15
16
17
18
19
20
21
1 0.055 (0.00) 0.361 (0.00) 0.098 (0.00) 0.079 (0.00) 0.011 (>0.20) 0.120 (0.00) 0.014 (>0.20) 0.117 (0.00) 0.058 (0.10) 0.048 (0.00) 0.142 (0.00) 1 0.125 (0.00) 0.038 (0.02) 0.141 (0.00) 0.148 (0.00) 0.125 (0.00) 0.360 (0.00) 0.139 (0.00) 0.187 (0.00) 0.010 (>0.20) 0.215 (0.00) 1 0.060 (0.00) 0.210 (0.00) 0.135 (0.00) 0.187 (0.00) 0.092 (0.00) 0.158 (0.00) 0.092 (0.00) 0.112 (0.00) 0.284 (0.00) 1 0.014 (>0.20) 0.058 (0.00) 0.017 (>0.20) 0.005 (>0.20) 0.000 (>0.20) 0.087 (0.01) 0.011 (>0.20) 0.055 (0.00) 1 0.008 (>0.20) 0.199 (0.00) 0.158 (0.00) 0.001 (>0.20) 0.029 (>0.20) 0.244 (0.00) 0.113 (0.00) 1 0.023 (0.20) 0.207 (0.00) 0.000 (>0.20) 0.135 (0.00) 0.018 (>0.20) 0.183 (0.00) 1 0.248 (0.00) 0.010 (>0.20) 0.072 (0.05) 0.085 (0.00) 0.129 (0.00) 1 0.025 (>0.20) 0.163 (0.00) 0.033 (0.05) 0.311 (0.00) 1 0.103 (0.00) 0.018 (0.00) 0.046 (0.20) 1 0.006 (0.00) 0.091 (0.00) 1 0.014 (>0.20) 1
Model We use a panel xed effect model, where each cross-sectional unit is a panel member that is surveyed for several times over a given time span. Panel regression enables us to only use one regression to analyze longitudinal behavior of rms and the market, and the association between nancial performance and stakeholder relations. Yit = 0 + 1F1 + . . . + 288F288 + 1 X it + 0 + 1P1 + 2P2 + . . . + 13P13 + it
(1)
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd
220
In Model 1, the subscript i indexes rm i, and t indexes time t. Yit is the nancial return or nancial risk for rm i at time t. Xit denes the stakeholder attributes for rm i at time t. b1 is the common coefcient for all rms and years, and mit is the error term regarding rm i at time t. The aim is to nd the common coefcient b2 that ts each observation. Therefore, we pooled cross-sectional and time-series data and applied a xed effect model. By means of the xed effect, the model assumes that every rm or every year has its own specic effect that is different from others and can be measured by a specic constant. When there are xed effects across rms, the model will include the dummy variables F1F288. The 288 dummies measure the specic effects of 288 rms leaving another rm effect in the constant a0. Alternatively, if there are xed effects across periods, the model will include 13 dummy variables P1P13 that estimate the specic effects of 13 years, leaving another year effect in the constant l0. Furthermore, when both rm and period (year) xed effects exist in the dataset together, the model will include both dummy F and dummy P variables. By isolating these rm specic or period specic effects from the independent variable Xit, we are able to obtain the common coefcient b1 in order to generate conclusions with respect to our hypotheses H1 and H2. Model 2 demonstrates the regression when we control for rm index attributes and size. Firm size is measured by the logarithm of the rms net sales and index dummies are according to whether rms are included in the Domini Social Index or the S&P500 Index. Yit = 0 + 1F1 + 2F2 + . . . + 288F288 + 1 X it + 2Dummy_DSI + 3Dummy_S&P P + 4LN ( net sales) + 0 + 1P1 + 2P2 + . . . + 13P13 + it (2)
Results
Table 3 shows the panel regressions for the overall stakeholder strengths and concerns in connection with nancial performance. The upper panel shows that for the relationship between nancial return and stakeholder relations the coefcient is signicantly negative but close to zero. Stakeholder concerns (i.e. poor stakeholder relations) are highly signicant and negatively related to nancial return. Thus, rms that engage in socially irresponsible actions are also nancially poor performers. In general, nancial return is slightly negatively associated with stakeholder relations. Concerning the connection between nancial risk and stakeholder strengths, the evidence suggests a neutral association, as none of the coefcients is signicant when explaining nancial risk. As to stakeholder concerns, however, we may conclude that poor stakeholder relations are signicantly associated with nancial risk. Thus, nancial return is negatively associated with both good and poor stakeholder relations and nancial risk is signicantly associated with poor stakeholder relations, but not with good relations. Table 3lower panelreveals that controlling for rm size and index attributes does not improve the coefcients of the key variables. In fact, DSI and S&P rms have lower return than non-members, but they also have lower (rm-level) risk. Furthermore, larger rmsas measured by net salesare less likely to achieve a higher return than small rms. As expected, size does contribute to the reduction of risk. This is in line with ndings elsewhere (see Derwall et al., 2005). We do not include style and industry effect in our analysis as we do not aim to explain returns but do want to assess the interaction between different constituting elements of social performance and nancial risk and return. The negative association between nancial returns and stakeholder strengths supports the conclusion from Ullmann (1985) that rms incur costs from beneting stakeholders and, therefore, are at an economic disadvantage. The theory of the rm suggests that management faces a trade-off and always chooses the optimal level of shareholder and stakeholder investment. Referring to the negative association discovered between nancial return and stakeholder strengths, we nd that stakeholder investment
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd
221
Dependent Independent Stakeholder OLS TSLS strengths Stakeholder OLS TSLS concerns Stakeholder strengths S&P participation Domini participation LN net sales Stakeholder concerns S&P participation Domini participation LN net sales
Financial return
Financial risk adj. R 0.22 0.22
bi
0.000 0.001 0.001 0.010 0.000 0.005 0.000 0.010 0.001 0.005
p-value 0.02 0.00 0.00 0.00 0.80 0.00 0.47 0.00 0.56 0.00
bi
0.00 0.02 0.001 0.01 0.000 0.009 0.004 0.002 0.001 0.009 0.003 0.003
p-value 0.53 0.15 0.00 0.09 0.69 0.07 0.07 0.30 0.00 0.08 0.19 0.17
adj. R 0.53 0.18 0.53 0.48 0.53
0.13
0.13
0.53
Table 3. Panel data analysis for the relations between nancial return, nancial risk (dependent variable) stakeholder strengths and stakeholder concerns (independent variable) 289 cross-sectional units and 14 time-series units. Domini participation: 1 for rms included in the DSI; 0 otherwise. S&P participation: 1 for rms included in the S&P rms; 0 otherwise. Fixed effect, period SUR and White diagonal. OLS refers to ordinary least squares estimations. TSLS refers to two-staged least squares estimations. Signicant relations are in bold.
is not less costly than shareholder investment. This argument is consistent with the conclusion generated by McWilliams and Siegel (2001), who developed a supply and demand model of corporate social responsibility and found a neutral relationship with nancial performance. Applying the costbenet analysis of McWilliams and Siegel, we argue that rms always struggle to reach the point where the increased revenues resulting from an enhanced stakeholder relation just offset the higher costs of using resources to achieve responsible conduct. Our analysis of nancial performance and stakeholder relations for a period of 14 years draws a conclusion from a long-term perspective that, eventually, rms will nd that implicit and explicit claims from stakeholders are no longer cheaper than the cost of borrowing from shareholders and bondholders. If the costs and revenues generated from stakeholder investment are not served properly, there may be negative spillovers to other stakeholders and, eventually, this will hamper a rms protability so that the shareholder will suffer from a lower return and higher rm-level risk. Furthermore, in line with Wu (2006), we nd that due to data scale and variable measurement our market-based parameters are much smaller than the accounting-based parameters found by Waddock and Graves (1997) and Tsoutsoura (2004). Another reason is rather natural: studies with different survey time spans and different sources of data will obviously generate different conclusions. Waddock and Graves (1997) performed their model across years 19891991; Tsoutsoura (2004) surveyed ve years data from 1996 to 2000. McGuire et al. (1988) found that better social performance results in lower nancial risk. Our ndings are in line with those of Becchetti and Ciciretti (2006), who conrm that individual socially responsible stocks have on average signicantly lower return than a control sample of stocks, when controlling for industry effect. However, we do not support their conclusion about lower risk. In general, given that the regressions in Table 3 do not provide consistent results, the overall association between the composite measures of stakeholder relations and nancial performance remains
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd
222
unclear. Therefore, we have reason to look into the underlying information regarding stakeholder relations and try to nd out whether the constituting factors of the aggregate stakeholder strengths and concern might matter with respect to nancial risk and return. To this extent, we investigate seven dimensions of stakeholder relations: community involvement (COM), corporate governance (CGOV), diversity of the workforce (DIV), employee relations (EMP), environmental policies (ENV), product characteristics (PRO) and human rights policies (HUM). In all models, nancial return and nancial risk are dependent variables and the different dimensions are independent variables. The results are presented in Table 4. We nd that poor community relations, environmental pollution and poor product attributes have a detrimental impact on the rms nancial return, whereas corporate governance strengths and product strengths result in an improved nancial return. Financial risk signicantly increases when rms take socially irresponsible actions towards the community, diversity and environment. It decreases when rms make socially benecial investments with respect to product attributes. It is quite surprising that strengths regarding diversity, employee relations and human rights are negatively associated with nancial return.
Dependent Independent COM Strengths Concerns CGOV Strengths Concerns DIV Strengths Concerns EMP Strengths Concerns ENV Strengths Concerns PRO Strengths Concerns HUM Strengths Concerns Financial performance Financial risk adj. R 0.15 0.21 0.15 0.12 0.22 0.21 0.19 0.15 0.14 0.15 0.14 0.14 0.14 0.14
bi
0.001 0.004 0.021 0.010 0.001 0.000 0.005 0.002 0.001 0.001 0.002 0.001 0.011 0.003
p-value 0.59 TSLS 0.00 OLS 0.00 OLS 0.87 TSLS 0.01 OLS 0.93 OLS 0.02 TSLS 0.65 TSLS 0.21 OLS 0.00 OLS 0.05 OLS 0.01 OLS 0.00 OLS 0.06 OLS
bi
0.001 0.004 0.008 0.001 0.000 0.003 0.000 0.032 0.060 0.002 0.003 0.000 0.003 0.001
p-value 0.32 OLS 0.04 OLS 0.65 TSLS 0.81 TSLS 0.29 OLS 0.05 OLS 0.95 OLS 0.18 TSLS 0.29 TSLS 0.09 OLS 0.09 OLS 0.77 OLS 0.76 OLS 0.80 OLS
adj. R 0.53 0.53 0.61 0.61 0.53 0.53 0.53 0.44 0.26 0.53 0.53 0.53 0.61 0.61
Table 4. Panel OLS and TSLS analysis of the relations between nancial return, nancial risk and social performance attributes OLS refers to ordinary least squares estimations. TSLS referes to two-staged least squares estimations. Signicant relations are in bold.
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd
223
The results from Table 4 can be linked to those found elsewhere in the literature. In contrast to Berman et al. (1999), we nd a negative association between nancial performance and employee relations as well as product characteristics. Our results conrm the statement by McWilliams and Siegel (2001) that rms with good employee relations face costs from progressive human resources management practices, higher wages and benets to enhance social performance. Therefore, it appears that the costs of training are higher than the value created by loyal employees. Our nding that poor environmental performance constitutes poor nancial performance is consistent with that of Russo and Fouts (1997). They have a resource-based view of the rm and nd a positive link between environment performance and economic performance, especially in high-growth industries. Earlier, Klassen and McLaughlin (1996) used an event study where they kept track of announcement data, concluding that signicant positive stock returns were documented following positive environmental events, highlighting the perceived value of strong environmental performance. We fail to support this view, as the parameter for environmental strengths is not signicant. These differences may arise from the measurement of nancial performance and data collection as well as from our expanded time series and more elaborate estimation procedure. Furthermore, we observe that shareholders seem to care about the downside effect of community relations, as nancial returns are hurt when a rm is involved in actions that result in controversies concerning its impact on the community. This contrasts with the work of Berman et al. (1999), who failed to nd a signicant association between community performance and nancial performance. They also found that rms benet from a diverse workforce through cost saving, enhanced productive capabilities and expanded markets. Diversity concern counts when rms discriminate against woman employees or lack a diverse workforce. Consistent with the explanation by Berman et al., we establish that rms with diversity concerns will incur cost increases, reduced productivity and failure to capture markets. We also nd that diversity concern is signicantly positively associated with nancial risk. Nevertheless, the question of why diversity strengths are related to a poor nancial return remains unclear. McWilliams and Siegel (1997, 2000, 2001) put emphasis on product attributes in explaining nancial performance. We too nd that the product is a key factor to enhance nancial return and reduce risk. Management should pay attention to the product attributes: the explicit costs of developing a good product is lower than the implicit costs such as wages. Over time, this contributes to an improved brand name. Firms will be able to obtain higher revenue when customers see the product as an experience good. We also nd that corporate governance has an impact on nancial return. The constituting elements of this construct, among others, include whether rms have limited compensation or own another rm etc. In particular, CEO compensation is a controversial issue in connection with nancial performance.
Conclusion
We analyze the trade-off between corporate shareholder performance and stakeholder relations. We employ a panel xed effect model with robust techniques, based on 289 US rms across a 14 year time period. We explore both the upside and the downside of nancial performance and stakeholder relations. The most important nding in this study probably is that we cannot nd support for a positive association between nancial performance and social strengths, which has been suggested by many previous studies. In fact, we nd a weak negative association between corporate nancial performance and both stakeholder strengths and concerns. This suggests that if management tends to satisfy shareholders by
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd
224
reaching a higher stock return, stakeholder interests have to be sacriced. We also establish that nancial risk is signicantly related to stakeholder concerns, but not to stakeholder strengths. Therefore, we conclude that risk primarily is affected by socially controversial activities. Furthermore, inference suggests that various social performance aspects are signicantly related to stock market performance. For example, nancial risk rises when rms become involved in controversies concerning community, diversity and environment. Financial risk decreases when rms supply good products. Therefore, we conrm Ullmanns (1985) view. Firms indeed do appear to face a trade-off between shareholder and stakeholder interests, as they incur costs from stakeholder investment and, therefore, put them at an economic disadvantage. In this sense, social performance should be chosen at the level where the joint benets for shareholders and stakeholders are optimized. At this level, the cost of responsible investments offsets the benets generated by socially responsible conduct. This rationale could induce later studies to explore a non-linear form of relationship between nancial performance and social performance, e.g. an inverted U-shaped relation. As a policy recommendation, we point out that rms act wisely to explicitly account for the trade-offs between their shareholders and their different stakeholders. A caveat is the way in which stakeholder relations are measured and the issue that the associations we do nd between nancial and stakeholder variables are not to be regarded as causal relations. Further research seems warranted to arrive at a thorough understanding of the very diverse associations between nancial risk and return and the stakeholders strengths and concerns as well as the trade-offs among the different stakeholders.
References
Alexander G, Bucholtz R. 1978. Corporate social responsibility and stock market performance. Academy of Management Journal 21: 479486. Allouche J, Laroche P. 2006, The relationship between corporate social responsibility and corporate nancial performance: a survey. In Corporate Social Responsibility: Performance and Stakeholders, Allouche J (ed.). Palgrave MacMillan: Basingstoke; 340. Bauer R, Koedijk K, Otten R. 2005. International evidence on ethical mutual fund performance and investment style. Journal of Banking and Finance 29: 17511767. Becchetti L, Ciciretti R. 2006. Corporate Social Responsibility and Stock Market Performance. University of Roma Tor Vergata, Rensselaer Polytechnic Institute. Bello ZY. 2005. Socially responsible investing and portfolio diversication. Journal of Financial Research 28: 4157. Berle AA, Means GC. 1932. The Modern Corporation and Private Property. MacMillan: New York. Berman S, Wicks A, Kotha S, Jones T. 1999. Does stakeholder orientation matter? The relationship between stakeholder management models and rm nancial performance. The Academy of Management Journal 42: 488506. Brammer S, Brooks C, Pavelin S. 2006. Corporate social performance and stock returns: UK evidence from disaggregate measures. Financial Management 35: 97116. Brummer JJ. 1991. Corporate Responsibility and Legitimacy: An Interdisciplinary Analysis. Greenwood: New York. Chatterji AK, Levine DI, Toffel MW. 2007. Do Corporate Social Responsibility Ratings Predict Corporate Social Performance? Corporate Social Responsibility Initiative Working Paper 33. John F. Kennedy School of Government, Harvard University: Cambridge, MA. Cornell B, Shapiro A. 1987. Corporate stakeholders and corporate nance. Financial Management 16: 514. Derwall J, Guenster N, Bauer R, Koedijk K. 2005. The eco-efciency premium puzzle. Financial Analyst Journal 61: 51 63. Elton EJ, Gruber MJ, Blake CR. 2003. Incentive fees and mutual funds. Journal of Finance 53: 779798. Fama EF, French KR. 1992. The cross-section of expected stock returns. Journal of Finance 427465. Freeman RE. 1984. Strategic Management: a Stakeholder Approach. Prentice-Hall: Englewood Cliffs, NJ. Friedman M. 1970. The social responsibility of business is to increase its prots. New York Times Magazine 13 September: 3233. Gezcy CC, Stambaugh RF, Levin D. 2005. Investing in Socially Responsible Mutual Funds. SSRN. http://ssrn.com/abstract=416380 [15 May 2007].
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd
225
Hillman AJ, Keim GD. 2001. Shareholder value, stakeholder management, and social issues: whats the bottom line? Strategic Management Journal 22: 125139. Hong H, Kacperczyk M. 2007. The Price of Sin: the Effects of Social Norms on Markets, SSRN Working Paper 766465. Jensen MC. 2001. Value maximization, stakeholder theory, and the corporate objective function. Journal of Applied Corporate Finance 14(3): 821. Jensen MC, Meckling WH. 1976. Theory of the rm: managerial behavior, agency costs, and ownership structure. Journal of Financial Economics 3: 305360. Klassen R, McLaughlin C. 1996. The impact of environmental management on rm performance. Management Science 42: 11991214. KLD Ratings Data: Inclusive Social Rating Criteria. 2003. KLD. Kurtz L. 1997. No effect, or no net effect? Studies on socially responsible investing. Journal of Investing 6(Winter): 3757. Lee DD, Faff RW. 2006. The Corporate Sustainability Discount Puzzle. SSRN. http://ssrn.com/abstract=921501 [22 May 2007]. Lockett A, Moon J, Visser W. 2006. Corporate social responsibility in management research: focus, nature, salience and sources of inuence. Journal of Management Studies 43: 115136. Margolis JD, Walsh JP. 2001. People and Prots? The Search for a Link Between a Companys Social and Financial Performance. Erlbaum: Mahwah, NJ. McGuire JB, Sundgren A, Schneeweiss T. 1988. Corporate social responsibility and rm nancial performance. Academy of Management Journal 31: 854872. McWilliams A, Siegel D. 1997. Event studies in management research: theoretical and empirical research. Academy of Management Journal 40: 626657. McWilliams A, Siegel D. 2000. Corporate social responsibility and nancial performance: correlation or misspecication? Strategic Management Journal 21(5): 603609. McWilliams A, Siegel D. 2001. Corporate social responsibility: a theory of the rm perspective. Academy of Management Review 26: 117127. McWilliams A, Siegel D, Wright P. 2005. Corporate Social Responsibility: Strategic Implications. Rensselaer Polytechnic Institute. Moskowitz M. 1972. Choosing socially responsible stocks. Business and Society 1: 7175. Orlitzky M, Schmidt FL, Rynes SL. 2003. Corporate social and nancial performance: a meta-analysis. Organization Studies 24: 403441. Porter ME, Van der Linde C. 1995. Green and competitive: ending the stalemate. Harvard Business Review 73(5): 120134. Preston LE, OBannon DP. 1997. The corporate socialnancial performance relationship: a typology and analysis. Business and Society 36: 419429. Russo M, Fouts P. 1997. A resource-based perspective on corporate environmental performance and protability. Academy of Management Journal 40: 534559. Sethi SP. 1979. A conceptual framework for environmental analysis of social issues and evaluation of business response patterns. Academy of Management Review 4: 6374. Sharfman M. 1996. The construct validity of the Kinder, Lydenberg & Domini social performance rating data. Journal of Business Ethics 15: 287296. Siegel D, Vitaliano D. 2006. An Empirical Analysis of the Strategic Use of Corporate Social Responsibility. Rensselaer Polytechnic Institute. Statman M. 2000. Socially responsible mutual funds. Financial Analysts Journal 56(3): 3039. Statman M. 2006. Socially responsible indexes: composition, performance, and tracking error. Journal of Portfolio Management 32(3): 100109. Tirole J. 2001. Corporate governance. Econometrica 69: 135. Tsoutsoura M. 2004. Corporate Social Responsibility and Financial Performance. University of California at Berkeley. Ullmann A. 1985. Data in search of a theory: a critical examination of the relationships among social performance, social disclosure, and economic performance. Academy of Management Review 10: 540577. Waddock SA, Graves S. 1997. Institutional owners and corporate social performance. Academy of Management Journal 31: 195200. Williamson OE. 1964. The Economics of Discretionary Behaviour: Managerial Objectives in a Theory of the Firm. Englewood Cliffs, NJ: Prentice-Hall. Wu ML. 2006. Corporate social performance, corporate nancial performance and rm size: a meta-analysis. Journal of American Academy of Business 8: 163171.
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd
226
Appendix KLD Social Issue Ratings

Community Strengths (COM_STR) Charitable Giving The company has consistently given over 1.5% of trailing three-year net earnings before taxes to charity, or has otherwise been notably generous in its giving. Innovative Giving The company has a notably innovative giving program that supports non-prot organizations, particularly those promoting self-sufciency among the economically disadvantaged. Companies that permit non-traditional federated charitable giving drives in the workplace are often noted in this section as well. Non-US Charitable Giving The company has made a substantial effort to make charitable contributions abroad, as well as in the US. To qualify, a company must make at least 20% of its giving, or have taken notably innovative initiatives in its giving program, outside the US. Support for Housing The company is a prominent participant in public/private partnerships that support housing initiatives for the economically disadvantaged, e.g. the National Equity Fund or the Enterprise Foundation. Support for Education Either the company has been notably innovative in its support for primary or secondary school education, particularly for those programs that benet the economically disadvantaged, or the company has prominently supported job-training programs for youth. Other Strength The company has either an exceptionally strong volunteer program, in-kind giving program, or engages in other notably positive community activities. Community Concerns (COM_CON) Investment Controversies The company is a nancial institution whose lending or investment practices have led to controversies, particularly ones related to the Community Reinvestment Act. Negative Economic Impact The companys actions have resulted in major controversies concerning its economic impact on the community. These controversies can include issues related to environmental contamination, water rights disputes, plant closings, put-or-pay contracts with trash incinerators, or other company actions that adversely affect the quality of life, tax base or property values in the community.
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd
227
Other Concern The company is involved with a controversy that has mobilized community opposition, or is engaged in other noteworthy community controversies. Corporate Governance Strengths (CGOV_STR) Limited Compensation The company has recently awarded notably low levels of compensation to its top management or its board members. The limit for a rating is total compensation of less than $500 000 per year for a CEO or $30 000 per year for outside directors. Ownership Strength The company owns between 20 and 50% of another company KLD has cited as having an area of stakeholder strength, or is more than 20% owned by a rm that KLD has rated as having stakeholder strengths. When a company owns more than 50% of another rm, it has a controlling interest, and KLD treats the second rm as if it is a division of the rst. Other Strength The company has an innovative compensation plan for its board or executives, a unique and positive corporate culture or some other initiative not covered by other KLD ratings. Corporate Governance Concerns (CGOV_CON) High Compensation The company has recently awarded notably high levels of compensation to its top management or its board members. The limit for a rating is total compensation of more than $10 million per year for a CEO or $100 000 per year for outside directors. Tax Disputes The company has recently been involved in major tax disputes involving more than $100 million with the Federal, state or local authorities. Ownership Concern The company owns between 20 and 50% of a company KLD has cited as having an area of stakeholder concern, or is more than 20% owned by a rm KLD has rated as having areas of concern. When a company owns more than 50% of another rm, it has a controlling interest, and KLD treats the second rm as if it is a division of the rst. Other Concern The company restated its earnings over an accounting controversy, has other accounting problems or is involved with some other controversy not covered by other KLD ratings. Diversity Strengths (DIV_STR) CEO The companys chief executive ofcer is a woman or a member of a minority group.
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd
228
Promotion The company has made notable progress in the promotion of women and minorities, particularly to line positions with prot-and-loss responsibilities in the corporation. Board of Directors Women, minorities and/or the disabled hold four seats or more (with no double counting) on the board of directors, or one-third or more of the board seats if the board numbers less than 12. Work/Life Benets The company has outstanding employee benets or other programs addressing work/life concerns, e.g. childcare, elder care or extime. Women and Minority Contracting The company does at least 5% of its subcontracting, or otherwise has a demonstrably strong record on purchasing or contracting, with women- and/or minority-owned businesses. Employment of the Disabled The company has implemented innovative hiring programs or other innovative human resource programs for the disabled or otherwise has a superior reputation as an employer of the disabled. Gay and Lesbian Policies The company has implemented notably progressive policies toward its gay and lesbian employees. In particular, it provides benets to the domestic partners of its employees. Other Strength The company has made a notable commitment to diversity that is not covered by other KLD ratings. Diversity Concerns (DIV_CON) Controversies The company has either paid substantial nes or civil penalties as a result of afrmative action controversies, or has otherwise been involved in major controversies related to afrmative action issues. Non-Representation The company has no women on its board of directors or among its senior line managers. Other Concern The company is involved in diversity controversies not covered by other KLD ratings. Employee Relations Strengths (EMP_STR) Cash Prot Sharing The company has a cash prot-sharing program through which it has recently made distributions to a majority of its workforce.
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd
229
Employee Involvement The company strongly encourages worker involvement and/or ownership through stock options available to a majority of its employees, gain sharing, stock ownership, sharing of nancial information or participation in management decision-making. Health and Safety Strength The company is noted by the US Occupational Health and Safety Administration for its safety programs. Retirement Benet Strength The company has a notably strong retirement benet program. Union Relations The company has a history of notably strong union relations. Other Strength The company has strong employee relations initiatives not covered by other KLD ratings. Employee Relations Concerns (EMP_CON) Union Relations The company has a history of notably poor union relations. Health and Safety Concern The company recently has either paid substantial nes or civil penalties for willful violations of employee health and safety standards, or has been otherwise involved in major health and safety controversies. Workforce Reductions The company has reduced its workforce by 15% in the most recent year or by 25% during the past two years, or it has announced plans for such reductions. Retirement Benet Concern The company has either a substantially underfunded dened benet pension plan, or an inadequate retirement benet program. Other Concern The company is involved in an employee relations controversy that is not covered by other KLD ratings. Environment Strengths (ENV_STR) Benecial Products and Services The company derives substantial revenues from innovative remediation products, environmental services or products that promote the efcient use of energy, or it has developed innovative products with
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd
230
environmental benets. (The term environmental service does not include services with questionable environmental effects, such as landlls, incinerators, waste-to-energy plants and deep injection wells.) Clean Energy The company has taken signicant measures to reduce its impact on climate change and air pollution through use of renewable energy and clean fuels or through energy efciency. The company has demonstrated a commitment to promoting climate-friendly policies and practices outside its own operations. Communications The company is a signatory to the CERES Principles, publishes a notably substantive environmental report or has notably effective internal communication systems in place for environmental best practices. Pollution Prevention The company has notably strong pollution prevention programs including both emission reductions and toxic-use reduction programs. Recycling The company is either a substantial user of recycled materials as raw materials in its manufacturing processes or a major factor in the recycling industry. Other Strength The company has demonstrated a superior commitment to management systems, voluntary programs or other environmentally proactive activities. Environment Concerns (ENV_CON) Hazardous Waste The companys liabilities for hazardous waste sites exceed $50 million, or the company has recently paid substantial nes or civil penalties for waste management violations. Regulatory Problems The company has recently paid substantial nes or civil penalties for violations of air, water or other environmental regulations, or it has a pattern of regulatory controversies under the Clean Air Act, Clean Water Act or other major environmental regulations. Ozone Depleting Chemicals The company is among the top manufacturers of ozone depleting chemicals such as HCFCs, methyl chloroform, methylene chloride or bromines.
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd
231
Substantial Emissions The companys legal emissions of toxic chemicals (as dened by and reported to the EPA) from individual plants into the air and water are among the highest of the companies followed by KLD. Agricultural Chemicals The company is a substantial producer of agricultural chemicals, i.e. pesticides or chemical fertilizers. Climate Change The company derives substantial revenues from the sale of coal or oil and its derivative fuel products, or the company derives substantial revenues indirectly from the combustion of coal or oil and its derivative fuel products. Such companies include electric utilities, transportation companies with eets of vehicles, auto and truck manufacturers and other transportation equipment companies. Other Concern The company has been involved in an environmental controversy that is not covered by other KLD ratings. Human Rights Strengths (HUM_STR) Indigenous People Relations Strength The company has established relations with indigenous peoples near its proposed or current operations (either in or outside the US) that respect the sovereignty, land, culture, human rights and intellectual property of the indigenous peoples. Labor Rights Strength The company has outstanding transparency on overseas sourcing disclosure and monitoring, or has particularly good union relations outside the US. Other Strength The company has undertaken exceptional human rights initiatives, including outstanding transparency or disclosure on human rights issues, or has otherwise shown industry leadership on human rights issues not covered by other KLD human rights ratings. Human Rights Concerns (HUM_CON) Burma Concern The company has operations or investment in, or sourcing from, Burma. Labor Rights Concern The companys operations outside the US have had major recent controversies related to employee relations and labor standards or its US operations have had major recent controversies involving sweatshop conditions or child labor.
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd
232
Indigenous People Relations Concern The company has been involved in serious controversies with indigenous peoples (either in or outside the US) that indicate the company has not respected the sovereignty, land, culture, human rights and intellectual property of indigenous peoples. Other Concern The companys operations outside the US have been the subject of major recent human rights controversies not covered by other KLD ratings. Product Strengths (PRO_STR) Quality The company has a long-term, well developed, company-wide quality program, or it has a quality program recognized as exceptional in US industry. R&D/Innovation The company is a leader in its industry for research and development (R&D), particularly by bringing notably innovative products to market. Benets to Economically Disadvantaged The company has as part of its basic mission the provision of products or services for the economically disadvantaged. Other Strength The companys products have notable social benets that are highly unusual or unique for its industry. Product Concerns (PRO_CON) Product Safety The company has recently paid substantial nes or civil penalties, or is involved in major recent controversies or regulatory actions, relating to the safety of its products and services. Marketing/Contracting Controversy The company has recently been involved in major marketing or contracting controversies, or has paid substantial nes or civil penalties relating to advertising practices, consumer fraud or government contracting. Antitrust The company has recently paid substantial nes or civil penalties for antitrust violations such as price xing, collusion or predatory pricing, or is involved in recent major controversies or regulatory actions relating to antitrust allegations. Other Concern The company has major controversies with its franchises, is an electric utility with nuclear safety problems, has defective product issues or is involved in other product-related controversies not covered by other KLD ratings.
Sust. Dev. 16, 213232 (2008) DOI: 10.1002/sd

Stakeholder Relations and Financial Performance

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Stakeholder Relations and Financial Performance

Uploaded by

Copyright:

Available Formats

Sustainable Development Sust. Dev. 16, 213232 (2008) Published online in Wiley InterScience (www.interscience.wiley.com) DOI: 10.1002/sd.