Since I have other writing obligations and it will be a few months before I can write this up properly, I want to make a note about definitional problems and a study I did earlier this year.
I've been bothered for some time by the definitional issues around corporate social responsibility and socially responsible investing. I don't agree with Hawken that the term SRI is "so broad it is meaningless", but it is a very general concept.
This matters for quantitative work, because many studies of CSR and SRI have the following logic:
1) Be socially responsible
2) ??? <---explanation of this joke is here
If we can't define the variable in Step 1 clearly, the work is worthless. No amount of ingenuity in Steps 2 and 3 can save it.
So how do we define corporate social responsibility? The definition game is a hard one, and there are many strategies. Depending on your pain threshold you could consult Webster's, Wittgenstein, or Ramsey. I only seriously considered two strategies, however.
First, you can create a description of the concept, like a dictionary definition. This fellow in the UK offers his own definition, as well as definitions from other sources. I ultimately decided not to pursue this strategy. My main problem with the descriptive approach is that many readers will feel no wiser after reading the definition than they did before. Ok, it's about "social responsiveness," "the continuing commitment of businesses to behave ethically," "capacity building for sustainable livelihoods," and "giving back to society." What does that really mean?
So this spring I took a different tack. Instead of trying to say what social responsibility is, I tried to identify companies that were viewed as superior social performers. If I can't describe it, I thought, I can at least find some companies that exemplify the concept. Then, when someone asks "what is social responsibility?" I can point to those companies.
Many researchers have done this by using the membership of social indexes. That's ok, but I think it can be improved on. I believe the majority of the companies in those indexes are there because of an absence of disqualifying characteristics, as opposed to the presence of notably positive ones.
So my objective was to compile a list of truly exceptional companies. I am a big believer in Armstrong's eclectic research approach, so I decided to make two lists using two different methodologies:
- The Poll: I sent an e-mail to the membership of SIRAN asking them to name a few companies they thought had notably strong social responsibility records. I received many responses, and after sorting through them I had the names of exactly 20 publicly-traded U.S. companies. (I excluded non-U.S. companies because my financial database is only complete for the U.S. firms. Also, three of these were coffee companies...not quite sure what to make of that.)
- The Quantitative Ranking: I consulted the social investment research firm KLD, and asked them to share from their database the top 20 raw social scores of companies in the Russell 1000 (these scores are used in the construction of the KLD Select Social Index).
Then I cross-referenced the lists. Eight companies appear on both. They are:
- General Mills
- Southwest Airlines
Finally, I applied an infallible test to determine if these companies were, in fact, socially responsible: I asked Steven Lydenberg. He said: "yes".
So I think this is a pretty good list. Whatever CSR is, you can show by both hard data and expert opinion that these companies have a lot of it.
A few superficial observations:
- All of the companies are consumer-facing, and all have strong brand names.
- Four of the companies are in consumer sectors, three in high-tech, one in transportation. The energy, materials, healthcare, finance, capital goods, telecommunications, and utilities sectors are not represented.
- For virtually all of these companies, historical growth rates, reinvestment rates, and market expectations for future growth (P/E and P/B ratios) are above market averages. This accords with the theoretical work done by Angel and Rivoli (1997).
- These are big companies. This again agrees with the work of of Angel and Rivoli.
- Of this group, I believe only Southwest has a unionized workforce.
So that's a start, anyway. If you believe social responsibility pays, it should pay best at these firms, arguably the most socially resposible publicly traded companies in America.