August 6, 2012 Chull-Young Lee SEN Summer School

Adam Smith (1776) : Invisible Hand Milton Friedman(1970) : Profit Maximization 2 History

Corporate Environments Stakeholders: Shareholders, Employees, Customers, Banks, Suppliers, Community, Society, Government Non-Market Forces: Regulations, Legal System, Regulatory Bodies, NGOs, Capital Market, SRI 3

Limitations of Invisible Hand: Market Failures E nvironment: External Costs S ocial: Justice & Fairness G overnance: Shareholders 4

E nvironment: External Costs Total Cost(Social Cost)= Private Cost + External Cost 5

S ocial : Justice & Fairness Distribution of Income Human Rights 6

G overnance: Shareholders Primacy: Profits vs Shareholders Conflict of Interest: Shareholders & Management 7

CSR Value Alignment: Corporate’s values vs Societal values Corporate Strategy: Long-term Growth & Development 8

Benefits of CSR Reduction of Conflicts : Corporation vs Society 9

Risk Management : bad press, NGO actions, consumer boycott, law suits 10

Waste Reduction : - BP’s greenhouse reduction program: $630M in savings and extra revenue -Du Pont’s chemical reduction program: Sales of clean-up services generated $1B revenue/yr -Dow chemical's energy saving projects( ): 204% return on investment 11

Regulatory Protection Brand Equity Employee Productivity Cost of Capital 12

What the Data Tell Us Corporate Profits Stock Price Market to Book Ratio: Stock Market Valuation Book Value of Co’s Assets “Good CSR is positively correlated with superior financial performance.” 13 =

Pollution & Stock Price -Hamilton’s 1995 Study: Based on U.S. EPA’s TRI(Toxics Release Inventory) “Average impact of TRI’s annual data releasing firms was $4.1M of stock- market values down.” -Dasgupa, Laplate & Mamingi’s 2001 Study: In Argentina, Chile, Mexico & Philippines, “Inferior performance of a firm(filed of a complaint to a government authority) dropped 5-15% stock price drop.” “ Superior performance of a firm (meeting expected standards) raised 20% stock price up.” -Korean’s 2004 Study: “A firm listed on Monthly Violation Report by Ministry of Environment experienced average 9.7% stock price drop.” 14

Environmental & Financial Performance -Dowell, Hart & Yeung(DHY) Study: S&P 500, U.S. “Shows positive correlation between environmental performance and Market-to-Book ratio.” Social Performance and Market-to-Book -Research by Heal, Fisman & Nair 2008: “Correlation is high especially among heavy advertisers, ie, when corporate image and brand equity are important.” -“Cause Related Marketing is effective.” EX: Coca Cola, Evian, BT Group, Bono’s Red 15

SRI : Investment Returns * Domini Social Index ( ) DSI S&P500 5 Years 20% 18.4% 10 Years 18.9% 17.4% * Calpers’ Engagement with 42 Companies(1987 – 1992) : Outperformed 41% over S&P500 * Pax World Balanced Fund ($1.1B) : 17 th among 293 mutual funds (5 Years: ) * Korean Stock Market KRX SRI Index KRX SRI KOSPI – % 35.5% DJSI Korea DJSI Korea KOSPI – % 24.7% ARK(Value Investing+SRI) ARK KOSPI – % % 16

Strategic Philanthropy Strategic Philanthropy Non-Profit Management & Governance Non-Profit Management & Governance Social Entrepreneurship Corporate Social Responsibility Corporate Social Responsibility Global Poverty, Emerging Markets & Int’l Development Global Poverty, Emerging Markets & Int’l Development Environmental Sustainability Environmental Sustainability Social Capital Market Social Blended Value Spectrum Financial Sustainable Development Socially Responsible Investment Socially Responsible Investment 17 Appendix: Blended Value Map Appendix: Blended Value Map