In Joel Makower's the e factor (Random House-Times Books, 1993), there is a report of a study conducted by Economic's Professors Stephen E. Erfle and Michael J. Fratantuono at Dickinson College. They wanted to test the Wall Street belief that having a good environmental record was costly to business and lowered profits and returns.
They began by selecting 8 economic measures commonly used to determine how well a business is doing. They then went to the Council on Economic Priorities' publication Shopping for a Better World to obtain their environmental rankings for 84 companies. They selected CEP's top-ranked 19 companies to compare against CEP's 34 bottom-ranked companies, using the 8 measures of corporate performance.
To their surprise, the top-ranked companies outperformed the bottom-ranked companies on all 8 measures. It appeared that having good environmental practices and programs had no negative impact on the bottom line, and, indeed, in some economic cases might even help improve corporate performance:
When Ritchie Lowry's book, GOOD MONEY: A Guide to Profitable Social Investing in the '90s, was being published in 1991, Good Money did several studies of the performance of socially screened portfolios versus unscreened portfolios by different types of social issues. What follows are the results of several of these studies:
In 1989, the Council on Economic Priorites (CEP) identified six consumer-products companies that received its highest rating for having at least two women on the board of directors and at least one among the top officers. CEP also identified six companies that had the lowest rating for no women on the board or among the top officers. Investors purchasing the stock of CEP's top-rated companies would have been rewarded with an almost 2-to-1 better gain in stock prices and dividends paid by January of 1991, compared to investors purchasing the stock of CEP's bottom-rated companies:Highest Rated Company
= 10-Year Change in Stock Price & 10-Year Change in Dividends
Hershey Foods = +867% & +260% Coca-Cola = +699% & +122% Campbell Soup = +659% & +147% General Mills = +624% & +300% Minnesota Mining & Manufacturing = +207% & +109% Mobil = +63% & +68%Lowest Rated Company
= 10-Year Change in Stock Price & 10-Year Change in Dividends
Carter-Wallace = +1,100% & +360% Flowers Industries = +434% & +622% Reynolds Metals = +209% & +59% Castle & Cook = +149% & -87% Chevron = +66% & +72% Smith's Food & Drug = +58% & +100%.
During the 1990s, increasing numbers of institutional and individual investors called for the divestiture of tobacco company stocks from their portfolios, because of the growing evidence of the serious health hazards associated with smoking. Wall Street and tobacco industry representatives argued that this would be financially imprudent, since tobacco companies were among the most profitable.
To test this argument, Good Money selected six North American tobacco companies that were among the largest. In response to increasing public efforts to restrict smoking, these companies had started to diversify. Good Money identified the industries into which the tobacco companies were diversifying and then picked a "pure play" in that industry (one with no tobacco connection):Tobacco Company - Diversifying Into - Non-Tobacco Company
American Brands - Life Insurance - Torchmark Culbro Corp. - Candy & Foods - Hershey Foods Imasco Ltd. - Fast-Foods - McDonald's Philip Morris - Cereals & Foods - General Mills Standard Commercial - Wool Products - Liz Claiborne Universal Corp. - Building Supplies - Home DepotFrom 1980 through 1990, the average stock price performance for the six "pure play" companies was an eye-popping +1,740%, compared to +373% for the tobacco companies during the 10-year period - a better than 4.6-to-1 difference!
What was that about the profitability in tobacco products?
In 1995, the Social Investment Forum published a study entitled After South Africa: Responsible Investment Trends in the U.S.. The study identified $639 billion invested in managed portfolios utilizing one or more social investment strategies. This was a ten-fold increase for the decade. The majority of the 1995 amount involved shareholder advocacy:
SIF is currently completing a follow-up study, and early results indicate that the figures have again increased significantly.
Corporations that declare publicly that an ethics code is an important aspect of their management philosophy perform better in both financial and non-financial terms than corporations that do not state such commitments, according to a study by a DePaul University researcher. Curtis C. Verschoor, the Ledger & Quill Research Professor at DePaul's School of Accountancy in Chicago, analyzed a section of the annual reports of 500 of the largest U.S. public companies for his study. To reach his conclusions, he determined whether companies emphasized ethics in the section and then compared company performance rankings using information published by Fortune Magazine, Business Week and the Stern Stewart Performance 1000 Report. He also looked at whether the companies were members of the Ethics Officer Association.The portions of the 500 annual reports Verschoor analyzed for his study are called AManagement=s Responsibilities for the Financial Statements@ or AManagement Report. These are sections in which companies may make voluntary disclosures about their internal controls to ensure proper financial reporting, effective compliance with laws and the efficient functioning of the organization.
Of the 500 companies studied, about 27 percent stated that a code of ethical conduct was part of their internal control system. "Since they are generally signed by top management and have been reviewed by auditors and attorneys, I consider these statements to be a public commitment to consider the interests of all of their stakeholders," Verschoor said. About half of this group had a more extensive or explicit commitment to ethical accountability. About 25 percent of the annual reports studied had no management report. The management reports of the remaining 48 percent did not mention
ethics codes.Verschoor then compared the performance of companies that made an ethical commitment with those that did not using the Stern Stewart Performance 1000 report of Market Value Added (MVA). MVA is a recently created measure of the value a company has provided to its shareholders compared with the total amount of their investments. Verschoor found that the average MVA of companies that made an internal control ethics code declaration was a significant $8.1 billion. That figure is 2.5 times larger than the MVA of companies that either did not mention a code of ethics or failed to include a management report. For the companies expressing a more extensive or explicit commitment to ethics, there was an even larger difference in MVA. The average MVA was $10.6 billion or almost three times the MVA of the companies that either had no ethics commitment or no management report.The financial performance of companies stating a commitment to ethics also was significantly better than those that did not make this statement based on Business Week's annual ranking of large companies. This ranking is based on eight more traditional aspects of financial performance including: total return for one and three years, sales growth for one and three years, profit growth for one and three years, net margin, and return on equity.Using the Business Week data, the average rank of the companies that made a public ethics commitment was 13.8 percentiles higher than the rank of companies expressing no ethics emphasis. The average rank of companies with a more extensive or explicit ethics commitment, was 14.8 percentiles higher. Verschoor also compared the groups of companies in terms of non-financial performance as reported by Fortune. Each year the magazine conducts an opinion survey of industry experts resulting in the Most Admired large companies
Another comparison of the companies brought some surprising results. Many companies have installed extensive ethical policies and procedures that include empowering a high-level oversight executive to perform the functions of an "ethics officer." These officers have formed the Ethics Officers Association (EOA). "It would be reasonable to conclude that EOA member companies are more likely to have more effective ethics programs than nonmembers, but apparently this does not result in superior corporate performance," Verschoor said. Only 29.3 percent of the studied companies
that commit to ethical accountability are members of the EOA.
Furthermore, Verschoor found no significant difference in the performance of the companies that are EOA members from the performance of nonmembers. Verschoor believes this shows that merely having a company ethics policy or even a membership in the EOA is not enough to help a company improve performance through the benefits of ethical practices. "Instead, the most plausible cause of superior performance is the ethical tone, set by top management and the board of directors, that permeates throughout all levels," he said. "Based on interviews with representatives of a number of the high-performing companies, I believe the cause of superior performance relates to the nature of the values that have infused an organization over time. The resulting code of conduct merely reflects these values," Verschoor said. This premise is also consistent with the results of a recent study by Arthur Andersen that found that an ethics program created to help guide behavior and reinforce company values is significantly more successful than one that
employees believe was established strictly for compliance purposes, he said.
Verschoor concluded: "An emphasis on proper values deals with setting examples, interpreting ethical principles and structuring appropriate reward systems. Ethical culture spreads from clear and unequivocal goal setting at the top and openness throughout the organization. On the other hand, compliance has to do with rules, hierarchy and sanctions. Legalistic codes of conduct designed only to protect an organization from conflicts of interest or rogue managerial behaviors are unlikely to motivate loyal employee behavior and result in long-term retention of favorable relationships with suppliers, customers and other stakeholders."
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