1. Shareholders and Standards The Value Puzzle of Corporate Social Responsibility Joanne Yoong 3/5/2005

2. A New Public Role for Firms? Appeal to private sector role in development initiatives –Supplement to government/NGO activity Growing concern for “responsible” business –Environmental / corporate governance scandals –Pressure from shareholders / regulators –Greater media focus How important is social responsibility to firms? 2000 (est)2005 55% 88% Economist Intelligence Unit survey of global CEOs, 2005

3. A (very) simplified world… Firm Shareholders Employees Managers Customers Suppliers Community Environment Regulator Stakehol der Advocate Profit-maximizing: present/future consumer demand, reputation, morale, risk-managing Profit-redistributing: advocate/regulator demands, managerial agency Why CSR ?

4. Voluntary Standards : FTSE4Good One of 2 leading UK CSR indexes, incepted 09/01 –Owned by FT group, open to all FTSE All-Share members 702 firms, 98% of UK market capitalization 296 firms in FTSE4Good Inclusion/Exclusion Process –Environmental, human rights, employee relations, and global supply-chain standards –Reviews and verification by independent 3 rd party –Additions/deletions publicly announced semi-annually “Win-win” vision claimed by FTSE : increase in firm value –Brand-equity, reputation, signalling, cost-savings –Supported by large but problematic empirical literature Overwhelmingly +ve link between CSR and financial performance

5. Event Study of Addition/Deletion Focus on firms added/deleted after inception –Collected from releases –Removed confounding events, insufficient data –Sample size: 93 additions, 19 deletions (12/01 – 12/04) Standard-event study methodology –Estimation window: 250 trading days –Event window: 1,3,5 days around event –Compute cumulative abnormal returns for each stock Mean-adjusted return Market-adjusted return (relative to FTSE All-Share) CAPM model returns (relative to FTSE All-Share)

6. No Strategic Case for Adoption 0.26 0.11%CAPM -0.44-0.27%Market-adjusted 0.760.40%Mean-adjusted Event Window: (-5 to +5 days) 1.280.53%CAPM 1.110.67%Market-adjusted 1.030.54%Mean-adjusted Event Window: (-3 to +3 days) 1.040.43%CAPM 0.630.38%Market-adjusted 0.890.47%Mean-adjusted Event Window: 0 days Brown-Warner statistic Cumulative Abnormal ReturnDeletions from Index

7. No Strategic Case for Adoption - 4.64 -1.74%CAPM -2.70-1.18%Market-adjusted -4.72-2.24%Mean-adjusted Event Window: (-5 to +5 days) -3.21-1.21%CAPM -1.820.80%Market-adjusted -3.82-1.81%Mean-adjusted Event Window: (-3 to +3 days) -0.59-0.22%CAPM 0.450.20%Market-adjusted -1.18-0.56%Mean-adjusted Event Window: 0 days Brown-Warner statistic Cumulative Abnormal ReturnAddition to Index

8. But Membership Keeps Rising...

9. Implications No “happy convergence between what your shareholders want and what is best for millions of people the world over” –On average, divergence is not resolved in favor of shareholders –Net impact from redistribution hurts shareholders No implication for overall welfare gains But firms continue to participate in CSR initiatives for other motives –Theory suggests political economy, agency problems Preempt future regulation by appeasing stakeholders/regulators Quality leaders adopt low standards, affect future “best practices” Managers set their own agendas separately –Consistent with current environment Increasing legislation and standardization, e.g. ISO standard Initiatives by international bodies e.g. Global Compact FTSE member CEOs see CSR mandate as “part of core values” “Value-puzzle” in fact promises possibilities beyond “win-win” vision