364_ftp

8/2/2019 364_ftp

1/20

Copyright 2008 John Wiley & Sons, Ltd and ERP Environment

* Correspondence to: Bert Scholtens, Department of Finance, University of Groningen, PO Box 800, 9700 AV Groningen, The Netherlands.E-mail: l [email protected]

Sustainable DevelopmentSust. Dev. 16, 213232(2008)Published online in Wiley InterScience(www.interscience.wiley.com)DOI: 10.1002/sd.364

Stakeholder Relations andFinancial Performance

Bert Scholtens* and Yangqin Zhou

Department of Finance, University of Groningen, Groningen, The Netherlands

ABSTRACTWe analyze how shareholder performance can be associated with stakeholder rela-tions. As such, we try to find out whether there is an association between financialperformance and stakeholder relations with respect to different theoretical notionsabout the firm. Financial performance is operationalized as the financial return of afirms shares. For stakeholder relations, we look into community involvement, corpo-rate governance, employee relations, environmental conduct, diversity of the work-force, human rights policies and product attributes. We find that the differentcomponents of stakeholder relations appear to be associated in a complex mannerwith shareholder performance. Therefore, it adds value to look closely into the detailsof stakeholder relations in connection with financial performance. Copyright 2008John Wiley & Sons, Ltd and ERP Environment.

Received 30 August 2007; revised 20 November 2007; accepted 28 November 2007

Keywords: financial performance; corporate social responsibility; stakeholder management; risk; return; theory of the firm

Introduction

ATTENTION FOR CORPORATE SOCIAL RESPONSIBILITY HAS INCREASED SIGNIFICANTLY DURING THE LASTdecade. Many studies investigate the connection between financial and social performance:does behaving in a socially responsible manner matter for the value of the firm? Numeroustheoretical views on the links between financial and social performance have been expressed

(for an overview see Allouche and Laroche, 2006). Furthermore, a large number of empirical studiesinvestigate the relationship between social and financial performance (see Orlitzky et al., 2003). Notsurprisingly, there are different opinions about the interaction between financial and social performance

and the empirical research has not arrived at a consensus (see Lockett et al., 2006). First, there is theliberal view that there is a negative link as social responsibility involves costs and therefore worsens afirms competitive position (Friedman, 1970). Related is the view that social constraints on firms andsocially responsible behavior may conflict with value maximization (Brummer, 1991; Jensen, 2001).There will also be a negative link between social and financial performance when managers pursue theirown objectives, which may conflict with shareholder and stakeholder objectives (Williamson, 1964;Jensen and Meckling, 1976). Sethi (1979) argues that firms may even put social responsibility over

8/2/2019 364_ftp

2/20

214 B. Scholtens and Y. Zhou

Copyright 2008 John Wiley & Sons, Ltd and ERP Environment Sust. Dev. 16, 213232 (2008)

DOI: 10.1002/sd

financial 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 leadto poorer financial performance due to negative synergy. Alternatively, the market equilibrium mightcancel out the costs of corporate socially responsible behavior (McWilliams and Siegel, 2001). In thisrespect, satisfying stakeholders interests may result in an improvement of the firms financial and

economic performance (Freeman, 1984). Or there can be positive synergy when strong social perfor-mance leads to improved financial performance (Porter and Van der Linde, 1995). However, McGuireet al. (1988) find that a firms prior financial performance conditions corporate social responsibility morethan its subsequent financial performance. McWilliams and Siegel (2001) argue that firms invest insocial activities because they want to satisfy the demands of their stakeholders. In market equilibrium,the costs and the benefits of socially responsible conduct will compensate each other. This is the basisfor a neutral interaction between financial and social performance.

Margolis and Walsh (2001) offer an excellent overview of the numerous empirical studies of the rela-tionship between social and financial performance. They find that corporate social performance is treatedas an independent variable in most of the studies. This variable is used to predict or precede financialperformance. 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 thestudies treated corporate social performance as the dependent variable. In two-thirds of these there wasa positive relationship between social and financial performance. Margolis and Walsh (2001) were verycautious in deriving conclusions from their overview. This is because there are serious methodologicalconcerns about many of the studies. Their main criticism is with respect to the measurement of corpo-rate social responsibility, the wide diversity of measures used to assess financial performance and thedirection and mechanisms of causation. Furthermore, Orlitzky et al. (2003) performed a meta-analysis.They found that the relationship between social and financial performance is positive in a wide varietyof contexts and sectors but also that residual variance usually is substantial.

The connection between social and financial performance plays an important role in the analysis ofsocially responsible investing (SRI) too. From a portfolio perspective, SRI eliminates securities from theuniverse of allowable assets. Consequently, SRI would reduce the potential for diversification. This hasbeen studied, among others, by Bauer et al. (2005) and Bello (2005). They find that the risk and returnattributes of these screened SRI portfolios do not significantly differ from their conventional counter-parts. Geczy et al. (2005) find that the cost of SRI depends on the perspective of the investors. Sociallyresponsible investors who do not believe in the ability of mutual funds to outperform the market interms of the capital asset pricing model do not face a significant opportunity loss from investing in SRImutual funds. However, an investor believing in a world consistent with the FamaFrench (1992) three-factor 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 returnsof stocks with high scores on SRI and those with low scores. Kurtz (1997) establishes that sociallyresponsible stocks do not appear to underperform the market as a whole and Statman (2000) finds thisfor SRI mutual funds. This is reestablished elsewhere in the literature too (e.g. Bauer et al., 2005; Derwallet al., 2005; Becchetti and Ciciretti, 2006; Lee and Faff, 2006; Statman, 2006) and it appears safe toconclude that there are no statistically significant differences in the performance of socially responsiblefunds and stocks and conventional ones. However, Hong and Kacperzcyk (2007) report higher expectedreturns for stocks that are excluded from a portfolio because of negative ethical issues (companies pro-ducing alcohol, tobacco and gambling). Brammer et al. (2006) find that their composite SRI indicatoris negatively related to UK stock returns.

In this paper, we explicitly address the association between financial market return and risk of thefirm and its stakeholder relations. In this respect, taking account of risk is an ingredient that is new

8/2/2019 364_ftp

3/20

Stakeholder Relations and Financial Performance 215


DOI: 10.1002/sd

compared with the existing literature. Furthermore, in contrast to most of the research mentioned, wespecifically look into the various constituting dimensions of stakeholder relations or corporate socialresponsibility, and not only into a composite measure. We use a database with US firms from Kinder,Domini and Lydenberg that takes account of the multidimensional aspects of the notion of stakeholderrelations (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 finan-cial 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 shareholderperformance and stakeholder relations and discuss potential linkages. Second, we introduce the dataand methods employed in this study. In the fourth section, we report our results. We end with a conclu-sion and discussion of our findings in connection with previous research and we will derive someimplications for firm management.

Background

Shareholder management aims at maximizing the returns to the owners of the shares of the firm. Therationale for this type of management is in the classical economic paradigm that the aim of the firm isto maximize profits. In this perspective, the firm is a money machine. Others regard the firm as a socialconstruct. Here, apart from shareholders, the firm has to serve the interests of other stakeholders too(Berle and Means, 1932). Because of institutions and market imperfections such as incomplete andasymmetric information, market power etc., the interests of the shareholder are not fully identical withthose of other stakeholders and there even may be conflicts of interest among the stakeholders (Jensen,2001; Tirole, 2001).

Firms face a trade-off between various aspects of social responsibility and financial performance. Theyincur costs from actions that benefit stakeholders that put them at an economic disadvantage comparedwith firms 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 extensiveenvironmental regulation or labor safety requirements, and establishing good relations with the com-munity and NGOs (McWilliams and Siegel, 2001). Furthermore, concern with various stakeholderinterests may distract the firms focus from profit making and limit the firms strategic alternatives. Acontrasting perspective is put forward by Moskowitz (1972). He claims that the explicit costs to a firmof behaving in the interests of its stakeholders are minimal. According to Moskowitz, firms may benefitfrom socially responsible actions in terms of employee morale and productivity as well as customergoodwill. Hillman and Keim (2001) point out that socially responsible behavior may also improve afirms relationship with bankers, investors and government officials. A third and intermediate view isthat the costs of socially responsible actions are significant but are offset by an accompanying reductionin other firm costs. Cornell and Shapiro (1987) suggest that a firm must satisfy parties with both explicitand implicit contracts (see also McWilliams and Siegel, 2000). Implicit claims such as product qualityare less costly to a firm than explicit claims such as wage contracts or dividends and interest rate pay-ments (McGuire et al., 1988). If implicit contracts are not served properly, parties to these contractsconcerning social responsibility of the firm may attempt to transform them into (more costly) explicitcontracts. Also, there may be spillover effects to other stakeholders if the firm does not honor the(implicit) contract with one particular stakeholder.

Traditional finance theory suggests that there is a direct and positive relation between financial riskand return (Elton et al., 2003). We are interested in the downside of the interaction between stakeholderrelations and financial performance. Alexander and Bucholtz (1978) argue that investors will consider

8/2/2019 364_ftp

4/20



DOI: 10.1002/sd

less socially responsible firms to be riskier investments, because they see management skills at the firmas low. Poor social responsibility may make it more difficult for a firm to obtain external finance andskilled and well-motivated employees. Then, low levels of social responsibility or poor stakeholder rela-tions may be associated with high financial risk of the firm. With high levels of responsibility or goodstakeholder relations, firms may face less financial risk because they will experience more stable rela-

tions with the government and the financial community (McGuire et al., 1988). So far, the associationbetween poor stakeholder relations (stakeholder concerns) and risk has not been empirically investigatedin a systematic manner, i.e. including all key stakeholders.

We want to test how financial return and stakeholder relations (both aggregated and disaggregated)are to be associated. Furthermore, we are interested in the relationship between financial risk (volatilityof the returns) and stakeholder relations. On the basis of the literature discussed, we come up with thefollowing hypotheses.

H1. There is a significant association between financial return and stakeholder relations.H2. There is a significant association between financial risk and stakeholder relations.

The null hypothesis in both instances is that there is no significant association between financialperformance (either risk or return) and stakeholder relations (either strengths or concerns).

Data and Method

Data

In order to associate stakeholder relations and financial performance, we need data about how firmsinteract with their stakeholders as well about financial risk and return of the firm. As to stakeholderrelations, we obtained data about US firms from KLD Research and Analytics, Inc. on social criteria forincluding and excluding stocks from a portfolio (KLD, 2003). KLD provides us with a database thatallows for time-series analysis for more than ten years. Most other social performance ratings have amuch 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 corporatesocial performance (see Sharfman, 1996, for an assessment of data validity). Positive screens indicatestrengths of a firm and negative screens indicate weaknesses or concerns of the firm. Each screen canbe summarized in a binary variable, which reflects whether the firm meets the particular criterion. Thescreens are summarized in groups of corresponding items referring to a general theme. Seven themesare identified: community, corporate governance, diversity, employee relations, environment, humanrights and product. In the appendix, we give a detailed description of the elements that constitute thestrengths and concerns of the themes. Please take note of the fact that these themes all are of a verydifferent nature and, as such, we have screens that relate to different dimensions. Financial data aretaken from Thomsons Datastream, which is a commercial data provider.

We selected firms that were monitored for the full period for which we had data. We investigate aperiod of 14 years (19912004), which covers two full business cycles. KLD starts its observations in1991. When relating financial risk and return to stakeholder relations, we use a time-lag of one yearbecause KLD data about a firms stakeholder relations in a particular year are available in February ofthe next year. Given data availability, we end up with 295 firms or 4130 firm years. Next, we linked thesefirms to stock market return, the market-to-book-ratio and the market capitalization of the firm in eachyear. We were not able to find a match between the KLD data and Datastream for six firms. This left uswith 289 firms and 4046 firm years. During the 14 years of observation, we could not trace back the

8/2/2019 364_ftp

5/20



DOI: 10.1002/sd

data in Datastream for the whole time span. This resulted in a loss of some additional firm years.Table 1 has the descriptive statistics of the key variables and the stakeholder attributes. It appears (seeTable 2) that financial return is slightly positively correlated with financial risks. This is consistentwith the notion that a highly volatile stock should be compensated with a higher return. The descriptivestatistics show that the distribution of financial return and financial risk are highly asymmetric. This is

usually the case with these data. Furthermore, we find that almost all stakeholder dimensions areimperfectly correlated with one another. This warrants taking account of the various dimensions in theremainder of the analysis.

A forward-looking and market-based measure is used to define financial performance and financialrisk as the dependent variables. The financial return is measured by the stock (equity) return earned byshareholders. Average monthly stock prices were collected from Datastream. We calculated firms rateof return for each month and took the average return for 12 months as one observation of financialreturn. Financial risk is defined as the volatility of the stock prices, which is measured by the standarddeviation of the monthly returns across one year.

The explanatory variables are various corporate stakeholder strengths and concerns as well as thecomposite 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 twois positive and significant. Stakeholder strengths are slightly negatively correlated with financial return,but slightly positively with financial risk. In our estimations, we control for firm size and two dummyvariables, depending on whether firm is included in the Domini 400 Social Index (DSI) and the Standardand Poors 500 Index (S&P500). Firm size is defined as the logarithm of net sales. We investigatedrecent 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 firm size has been consistently used as a control variable in these studies. Firm size

Definition Mean Std. dev. Skewness Kurtosis Observations

FRETURN Financial return 0.012 0.024 0.247 5.496 4046FRISK Financial risk 0.088 0.044 2.071 13.00 4046STRENGTHS Corporate stakeholder strengths 2.357 2.283 1.459 5.682 4046CONCERNS Corporate stakeholder concerns 2.192 2.306 1.685 6.574 4046LN_netsales Logarithm of net sales 15.14 1.355 0.079 3.033 3851COM_STR Community strengths 0.426 0.740 1.924 6.758 4046CGOV_STR Corporate governance strengths 0.032 0.183 5.848 38.752 868DIV_STR Diversity strengths 0.827 1.204 1.663 5.664 4046EMP_STR Employee relations strengths 0.521 0.750 1.479 5.096 4046ENV_STR Environment strengths 0.292 0.567 2.097 7.813 4045PRO_STR Product strengths 0.219 0.439 1.766 5.224 4045HUM_STR Human rights strengths 0.009 0.096 10.272 106.509 868COM_CON Community concerns 0.076 0.273 3.486 14.443 4046CGOV_CON Corporate governance concerns 0.664 0.667 0.670 3.073 868DIV_CON Diversity concerns 0.198 0.407 1.654 4.175 4046EMP_CON Employee relations concerns 0.317 0.559 1.704 5.646 4046ENV_CON Environment concerns 0.469 0.942 2.306 8.371 4045PRO_CON Product concerns 0.374 0.714 2.161 7.823 4046HUM_CON Human rights concerns 0.238 0.477 1.907 6.249 868

Table 1. Descriptive statisticsThe Appendix goes into the details of the definitions of the stakeholder variables.

8/2/2019 364_ftp

6/20



DOI: 10.1002/sd

matters in determining the association between financial and social performance, as small firms maynot exhibit as much socially responsible behavior as large firms do (Waddock and Graves, 1997). Wecould not find the net sales for some firms and years; therefore, the tests carrying control variables wereconstructed in an unbalanced panel. Firm size is negatively correlated with financial return and financialrisk and positively with both overall stakeholder strengths and concerns. This suggests that large firmsmay not necessarily outperform their competitors by higher returns but that size does contribute tolower firm-level risk. In general, large firms are more likely to foster good relationships with stakehold-ers than small firms, but they also are more exposed to downside issues.

1 2 3 4 5 6 7 8 9

1. FRETURN 1

2. FRISK 0.049

(0.00)

1

3. STRENGTHS 0.037(0.02) 0.030(0.10) 1

4. CONCERNS 0.057

(0.00)

0.003

(>0.20)

0.272

(0.00)

1

5. LOG_NET_SALE 0.032

(0.05)

0.026

(0.10)

0.394

(0.00)

0.564

(0.00)

1

6. DUMMY_DSI 0.030

(0.02)

0.074

(0.00)

0.033

(0.02)

0.541

(0.00)

0.323

(0.00)

1

7. DUMMY_S&P 0.039

(0.02)

0.039

(0.02)

0.164

(0.00)

0.310

(0.00)

0.599

(0.00)

0.343

(0.00)

1

8. CGOV_STR 0.040

(>0.20)

0.042

(>0.20)

0.005

(>0.20)

0.103

(0.00)

0.205

(0.00)

0.104

(0.00)

0.218

(0.00)

1

9. CGOV_CON 0.050

(0.20)

0.026

(>0.20)

0.359

(0.00)

0.548

(0.00)

0.443

(0.00)

0.172

(0.00)

0.398

(0.00)

0.138

(0.00)

1

10. COM_STR 0.001

(>0.20)

0.076

(0.00)

0.582

(0.00)

0.065

(0.00)

0.272

(0.00)

0.046

(0.00)

0.178

(0.00)

0.052

(0.20)

0.196

(0.00)

11. COM_CON 0.063

(0.00)

0.015

(>0.20)

0.159

(0.00)

0.458

(0.00)

0.216

(0.00)

0.207

(0.00)

0.115

(0.00)

0.050

(0.20)

0.195

(0.00)

12. DIV_STR 0.044

(0.00)

0.041

(0.00)

0.789

(0.00)

0.277

(0.00)

0.398

(0.00)

0.013

(>0.20)

0.206

(0.00)

0.069

(0.05)

0.353

(0.00)

13. DIV_CON 0.022

(0.20)

0.080

(0.00)

0.058

(0.00)

0.217

(0.00)

0.029

(0.10)

0.020

(>0.20)

0.089

(0.00)

0.000

(>0.20)

0.038

(>0.20)

14. EMP_STR 0.035

(0.05)

0.104

(0.00)

0.563

(0.00)

0.155

(0.00)

0.157

(0.00)

0.052

(0.00)

0.053

(0.00)

0.006

(>0.20)

0.201

(0.00)

15. EMP_CON 0.003

(>0.20)

0.020

(>0.20)

0.070

(0.00)

0.489

(0.00)

0.221

(0.00)

0.206

(0.00)

0.109

(0.00)

0.004

(>0.20)

0.129

(0.00)

16. ENV_STR 0.021

(0.20)

0.045

(0.00)

0.466

(0.00)

0.233

(0.00)

0.187

(0.00)

0.134

(0.00)

0.007

(>0.20)

0.049

(0.20)

0.155

(0.00)17. ENV_CON 0.068

(0.00)

0.088

(0.00)

0.145

(0.00)

0.734

(0.00)

0.390

(0.00)

0.513

(0.00)

0.215

(0.00)

0.071

(0.05)

0.208

(0.00)

18. HUM_STR 0.004

(>0.20)

0.052

(0.20)

0.149

(0.00)

0.065

(0.10)

0.078

(0.05)

0.038

(>0.20)

0.050

(0.20)

0.017

(>0.20)

0.103

(0.00)

19. HUM_CON 0.115

(0.00)

0.008

(>0.20)

0.075

(0.05)

0.391

(0.00)

0.187

(0.00)

0.211

(0.00)

0.079

(0.02)

0.035

(>0.20)

0.122

(0.00)

20. PRO_STR 0.019

(>0.20)

0.045

(0.00)

0.378

(0.00)

0.017

(>0.20)

0.054

(0.00)

0.082

(0.00)

0.042

(0.00)

0.002

(>0.20)

0.101

(0.00)21. PRO_CON 0.054

(0.00)

0.024

(0.20)

0.266

(0.00)

0.660

(0.00)

0.419

(0.00)

0.292

(0.00)

0.226

(0.00)

0.066

(0.10)

0.377

(0.00)

Table 2. Correlation matrix between all variablesSource: KLD rating data, 2003.

8/2/2019 364_ftp

7/20



DOI: 10.1002/sd

Model

We use a panel fixed effect model, where each cross-sectional unit is a panel member that is surveyedfor several times over a given time span. Panel regression enables us to only use one regression toanalyze longitudinal behavior of firms and the market, and the association between financial perfor-mance and stakeholder relations.

Y F F X P P P it it it= + + + + + + + + ++ 0 1 1 288 288 1 0 1 1 2 2 13 13. . . . . . (1)

10 11 12 13 14 15 16 17 18 19 20 21

1

0.055

(0.00)

1

0.361

(0.00)

0.125

(0.00)

1

0.098

(0.00)

0.038

(0.02)

0.060

(0.00)

1

0.079

(0.00)

0.141

(0.00)

0.210

(0.00)

0.014

(>0.20)

1

0.011

(>0.20)

0.148

(0.00)

0.135

(0.00)

0.058

(0.00)

0.008

(>0.20)

1

0.120

(0.00)

0.125

(0.00)

0.187

(0.00)

0.017

(>0.20)

0.199

(0.00)

0.023

(0.20)

1

0.014

(>0.20)

0.360

(0.00)

0.092

(0.00)

0.005

(>0.20)

0.158

(0.00)

0.207

(0.00)

0.248

(0.00)

1

0.117

(0.00)

0.139

(0.00)

0.158

(0.00)

0.000

(>0.20)

0.001

(>0.20)

0.000

(>0.20)

0.010

(>0.20)

0.025

(>0.20)

1

0.058

(0.10)

0.187

(0.00)

0.092

(0.00)

0.087

(0.01)

0.029

(>0.20)

0.135

(0.00)

0.072

(0.05)

0.163

(0.00)

0.103

(0.00)

1

0.048

(0.00)

0.010

(>0.20)

0.112

(0.00)

0.011

(>0.20)

0.244

(0.00)

0.018

(>0.20)

0.085

(0.00)

0.033

(0.05)

0.018

(0.00)

0.006

(0.00)

1

0.142

(0.00)

0.215

(0.00)

0.284

(0.00)

0.055

(0.00)

0.113

(0.00)

0.183

(0.00)

0.129

(0.00)

0.311

(0.00)

0.046

(0.20)

0.091

(0.00)

0.014

(>0.20)

1

8/2/2019 364_ftp

8/20



DOI: 10.1002/sd

In Model 1, the subscript i indexes firm i, and t indexes time t. Yit is the financial return or financialrisk for firm i at time t. Xit defines the stakeholder attributes for firm i at time t. b1 is the common coef-ficient for all firms and years, and mit is the error term regarding firm i at time t. The aim is to find thecommon coefficient b2 that fits each observation. Therefore, we pooled cross-sectional and time-seriesdata and applied a fixed effect model. By means of the fixed effect, the model assumes that every firm

or every year has its own specific effect that is different from others and can be measured by a specificconstant. When there are fixed effects across firms, the model will include the dummy variables F1F288.The 288 dummies measure the specific effects of 288 firms leaving another firm effect in the constanta0. Alternatively, if there are fixed effects across periods, the model will include 13 dummy variablesP1P13 that estimate the specific effects of 13 years, leaving another year effect in the constant l0. Fur-thermore, when both firm and period (year) fixed effects exist in the dataset together, the model willinclude both dummy Fand dummy Pvariables. By isolating these firm specific or period specific effectsfrom the independent variable Xit, we are able to obtain the common coefficient b1 in order to generateconclusions with respect to our hypotheses H1 and H2. Model 2 demonstrates the regression when wecontrol for firm index attributes and size. Firm size is measured by the logarithm of the firms net salesand index dummies are according to whether firms are included in the Domini Social Index or the

S&P500 Index.

Y F F F X it it= + + + + + + + 0 1 1 2 2 288 288 1 2 3. . . Dummy_DSI Dummy_S&PP

net salesLN+ ( ) + + + + + + 4 0 1 1 2 2 13 13P P P it. . .(2)

Results

Table 3 shows the panel regressions for the overall stakeholder strengths and concerns in connectionwith financial performance. The upper panel shows that for the relationship between financial returnand stakeholder relations the coefficient is significantly negative but close to zero. Stakeholder concerns(i.e. poor stakeholder relations) are highly significant and negatively related to financial return. Thus,firms that engage in socially irresponsible actions are also financially poor performers. In general, finan-cial return is slightly negatively associated with stakeholder relations. Concerning the connection betweenfinancial risk and stakeholder strengths, the evidence suggests a neutral association, as none of thecoefficients is significant when explaining financial risk. As to stakeholder concerns, however, we mayconclude that poor stakeholder relations are significantly associated with financial risk. Thus, financialreturn is negatively associated with both good and poor stakeholder relations and financial risk is sig-nificantly associated with poor stakeholder relations, but not with good relations.

Table 3lower panelreveals that controlling for firm size and index attributes does not improve thecoefficients of the key variables. In fact, DSI and S&P firms have lower return than non-members, butthey also have lower (firm-level) risk. Furthermore, larger firmsas measured by net salesare lesslikely to achieve a higher return than small firms. As expected, size does contribute to the reduction ofrisk. This is in line with findings elsewhere (see Derwall et al., 2005). We do not include style andindustry effect in our analysis as we do not aim to explain returns but do want to assess the interactionbetween different constituting elements of social performance and financial risk and return.

The negative association between financial returns and stakeholder strengths supports the conclusionfrom Ullmann (1985) that firms incur costs from benefiting stakeholders and, therefore, are at an eco-nomic disadvantage. The theory of the firm suggests that management faces a trade-off and alwayschooses the optimal level of shareholder and stakeholder investment. Referring to the negative associa-tion discovered between financial return and stakeholder strengths, we find that stakeholder investment

8/2/2019 364_ftp

9/20



DOI: 10.1002/sd

is not less costly than shareholder investment. This argument is consistent with the conclusion gener-ated by McWilliams and Siegel (2001), who developed a supply and demand model of corporate socialresponsibility and found a neutral relationship with financial performance. Applying the costbenefitanalysis of McWilliams and Siegel, we argue that firms always struggle to reach the point where theincreased revenues resulting from an enhanced stakeholder relation just offset the higher costs of usingresources to achieve responsible conduct. Our analysis of financial performance and stakeholder rela-tions for a period of 14 years draws a conclusion from a long-term perspective that, eventually, firmswill find that implicit and explicit claims from stakeholders are no longer cheaper than the cost of bor-rowing from shareholders and bondholders. If the costs and revenues generated from stakeholderinvestment are not served properly, there may be negative spillovers to other stakeholders and, eventu-ally, this will hamper a firms profitability so that the shareholder will suffer from a lower return andhigher firm-level risk. Furthermore, in line with Wu (2006), we find that due to data scale and variablemeasurement 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: studieswith different survey time spans and different sources of data will obviously generate different conclu-sions. Waddock and Graves (1997) performed their model across years 19891991; Tsoutsoura (2004)surveyed five years data from 1996 to 2000. McGuire et al. (1988) found that better social performanceresults in lower financial risk. Our findings are in line with those of Becchetti and Ciciretti (2006), whoconfirm that individual socially responsible stocks have on average significantly lower return than acontrol sample of stocks, when controlling for industry effect. However, we do not support their conclu-sion about lower risk.

In general, given that the regressions in Table 3 do not provide consistent results, the overall asso-ciation between the composite measures of stakeholder relations and financial performance remains

Dependent

Independent

Financial return Financial risk

bi p-value adj. R bi p-value adj. R

Stakeholder

strengths

OLS 0.000 0.02 0.22 0.00 0.53 0.53

TSLS 0.02 0.15 0.18Stakeholderconcerns

OLS 0.001 0.00 0.22 0.001 0.00 0.53TSLS 0.01 0.09 0.48

Stakeholder strengths 0.001 0.00

0.13

0.000 0.69

0.53S&P participation 0.010 0.00 0.009 0.07Domini participation 0.000 0.80 0.004 0.07LN net sales 0.005 0.00 0.002 0.30Stakeholder concerns 0.000 0.47

0.13

0.001 0.00

0.53S&P participation 0.010 0.00 0.009 0.08Domini participation 0.001 0.56 0.003 0.19LN net sales 0.005 0.00 0.003 0.17

Table 3. Panel data analysis for the relations between financial return, financial risk (dependent variable) stakeholder strengths

and stakeholder concerns (independent variable)289 cross-sectional units and 14 time-series units.Domini participation: 1 for firms included in the DSI; 0 otherwise.S&P participation: 1 for firms included in the S&P firms; 0 otherwise.Fixed effect, period SUR and White diagonal.OLS refers to ordinary least squares estimations.TSLS refers to two-staged least squares estimations.Significant relations are in bold.

8/2/2019 364_ftp

10/20



DOI: 10.1002/sd

unclear. Therefore, we have reason to look into the underlying information regarding stakeholder rela-tions and try to find out whether the constituting factors of the aggregate stakeholder strengths andconcern might matter with respect to financial risk and return. To this extent, we investigate sevendimensions 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, financial return and financialrisk are dependent variables and the different dimensions are independent variables. The results arepresented in Table 4. We find that poor community relations, environmental pollution and poor productattributes have a detrimental impact on the firms financial return, whereas corporate governancestrengths and product strengths result in an improved financial return. Financial risk significantlyincreases when firms take socially irresponsible actions towards the community, diversity and environ-ment. It decreases when firms make socially beneficial investments with respect to product attributes.It is quite surprising that strengths regarding diversity, employee relations and human rights are nega-tively associated with financial return.

Dependent

Independent

Financial performance Financial risk

bi p-value adj. R bi p-value adj. R

COM Strengths 0.001 0.59TSLS

0.15 0.001 0.32OLS

0.53

Concerns 0.004 0.00OLS

0.21 0.004 0.04OLS

0.53

CGOV Strengths 0.021 0.00OLS

0.15 0.008 0.65TSLS

0.61

Concerns 0.010 0.87TSLS

0.12 0.001 0.81TSLS

0.61

DIV Strengths 0.001 0.01

OLS

0.22 0.000 0.29

OLS

0.53


0.21 0.003 0.05OLS

0.53

EMP Strengths 0.005 0.02TSLS

0.19 0.000 0.95OLS

0.53

Concerns 0.002 0.65TSLS

0.15 0.032 0.18TSLS

0.44

ENV Strengths 0.001 0.21OLS

0.14 0.060 0.29TSLS

0.26


0.15 0.002 0.09OLS

0.53

PRO Strengths 0.002 0.05OLS

0.14 0.003 0.09OLS

0.53


0.14 0.000 0.77OLS

0.53

HUM Strengths 0.011 0.00OLS

0.14 0.003 0.76OLS

0.61


0.14 0.001 0.80OLS

0.61

Table 4. Panel OLS and TSLS analysis of the relations between financial return, financial risk and social performance attributesOLS refers to ordinary least squares estimations.TSLS referes to two-staged least squares estimations.Significant relations are in bold.

8/2/2019 364_ftp

11/20



DOI: 10.1002/sd

The results from Table 4 can be linked to those found elsewhere in the literature. In contrast toBerman et al. (1999), we find a negative association between financial performance and employee rela-tions as well as product characteristics. Our results confirm the statement by McWilliams and Siegel(2001) that firms with good employee relations face costs from progressive human resources manage-ment practices, higher wages and benefits to enhance social performance. Therefore, it appears that the

costs of training are higher than the value created by loyal employees. Our finding that poor environ-mental performance constitutes poor financial performance is consistent with that of Russo and Fouts(1997). They have a resource-based view of the firm and find a positive link between environmentperformance and economic performance, especially in high-growth industries. Earlier, Klassen andMcLaughlin (1996) used an event study where they kept track of announcement data, concluding thatsignificant positive stock returns were documented following positive environmental events, highlight-ing the perceived value of strong environmental performance. We fail to support this view, as theparameter for environmental strengths is not significant. These differences may arise from the measure-ment of financial performance and data collection as well as from our expanded time series and moreelaborate estimation procedure.

Furthermore, we observe that shareholders seem to care about the downside effect of community

relations, as financial returns are hurt when a firm is involved in actions that result in controversiesconcerning its impact on the community. This contrasts with the work of Berman et al. (1999), whofailed to find a significant association between community performance and financial performance. Theyalso found that firms benefit from a diverse workforce through cost saving, enhanced productive capa-bilities and expanded markets. Diversity concern counts when firms discriminate against womanemployees or lack a diverse workforce. Consistent with the explanation by Berman et al., we establishthat firms with diversity concerns will incur cost increases, reduced productivity and failure to capturemarkets. We also find that diversity concern is significantly positively associated with financial risk.Nevertheless, the question of why diversity strengths are related to a poor financial return remainsunclear.

McWilliams and Siegel (1997, 2000, 2001) put emphasis on product attributes in explaining financialperformance. We too find that the product is a key factor to enhance financial return and reduce risk.Management should pay attention to the product attributes: the explicit costs of developing a goodproduct is lower than the implicit costs such as wages. Over time, this contributes to an improved brandname. Firms will be able to obtain higher revenue when customers see the product as an experiencegood. We also find that corporate governance has an impact on financial return. The constitutingelements of this construct, among others, include whether firms have limited compensation or ownanother firm etc. In particular, CEO compensation is a controversial issue in connection with financialperformance.

Conclusion

We analyze the trade-off between corporate shareholder performance and stakeholder relations. Weemploy a panel fixed effect model with robust techniques, based on 289 US firms across a 14 year timeperiod. We explore both the upside and the downside of financial performance and stakeholderrelations.

The most important finding in this study probably is that we cannot find support for a positive asso-ciation between financial performance and social strengths, which has been suggested by many previousstudies. In fact, we find a weak negative association between corporate financial performance and bothstakeholder strengths and concerns. This suggests that if management tends to satisfy shareholders by

8/2/2019 364_ftp

12/20



DOI: 10.1002/sd

reaching a higher stock return, stakeholder interests have to be sacrificed. We also establish that finan-cial risk is significantly related to stakeholder concerns, but not to stakeholder strengths. Therefore, weconclude that risk primarily is affected by socially controversial activities. Furthermore, inference sug-gests that various social performance aspects are significantly related to stock market performance. Forexample, financial risk rises when firms become involved in controversies concerning community,

diversity and environment. Financial risk decreases when firms supply good products.Therefore, we confirm 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 levelwhere the joint benefits for shareholders and stakeholders are optimized. At this level, the cost of respon-sible investments offsets the benefits generated by socially responsible conduct. This rationale couldinduce later studies to explore a non-linear form of relationship between financial performance andsocial performance, e.g. an inverted U-shaped relation. As a policy recommendation, we point out thatfirms act wisely to explicitly account for the trade-offs between their shareholders and their differentstakeholders. A caveat is the way in which stakeholder relations are measured and the issue that theassociations we do find between financial and stakeholder variables are not to be regarded as causal

relations. Further research seems warranted to arrive at a thorough understanding of the very diverseassociations between financial risk and return and the stakeholders strengths and concerns as well asthe trade-offs among the different stakeholders.

References

Alexander G, Bucholtz R. 1978. Corporate social responsibility and stock market performance. Academy of Management Journal21: 479486.

Allouche J, Laroche P. 2006, The relationship between corporate social responsibility and corporate financial performance: asurvey. 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. Journalof Banking and Finance29: 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 diversification.Journal of Financial Research28: 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 firm financial performance. The Academy of Management Journal42: 488506.Brammer S, Brooks C, Pavelin S. 2006. Corporate social performance and stock returns: UK evidence from disaggregate

measures. Financial Management35: 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? Cor-

porate 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 finance. Financial Management16: 514.Derwall J, Guenster N, Bauer R, Koedijk K. 2005. The eco-efficiency premium puzzle. Financial Analyst Journal 61: 51

63.Elton EJ, Gruber MJ, Blake CR. 2003. Incentive fees and mutual funds. Journal of Finance53: 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 profits. 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].

8/2/2019 364_ftp

13/20



DOI: 10.1002/sd

Hillman AJ, Keim GD. 2001. Shareholder value, stakeholder management, and social issues: whats the bottom line? StrategicManagement Journal22: 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

Finance14(3): 821.Jensen MC, Meckling WH. 1976. Theory of the firm: managerial behavior, agency costs, and ownership structure. Journal of

Financial Economics3: 305360.Klassen R, McLaughlin C. 1996. The impact of environmental management on firm performance. Management Science42:

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 Investing6(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 influence.Journal of Management Studies43: 115136.Margolis JD, Walsh JP. 2001. People and Profits? 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 firm financial performance. Academy of

Management Journal31: 854872.

McWilliams A, Siegel D. 1997. Event studies in management research: theoretical and empirical research. Academy of Manage-ment Journal40: 626657.

McWilliams A, Siegel D. 2000. Corporate social responsibility and financial performance: correlation or misspecification?Strategic Management Journal21(5): 603609.

McWilliams A, Siegel D. 2001. Corporate social responsibility: a theory of the firm perspective. Academy of Management Review26: 117127.

McWilliams A, Siegel D, Wright P. 2005. Corporate Social Responsibility: Strategic Implications. Rensselaer PolytechnicInstitute.

Moskowitz M. 1972. Choosing socially responsible stocks. Business and Society1: 7175.Orlitzky M, Schmidt FL, Rynes SL. 2003. Corporate social and financial performance: a meta-analysis. Organization Studies24:

403441.Porter ME, Van der Linde C. 1995. Green and competitive: ending the stalemate. Harvard Business Review73(5): 120134.Preston LE, OBannon DP. 1997. The corporate socialfinancial performance relationship: a typology and analysis. Business

and Society36: 419429.Russo M, Fouts P. 1997. A resource-based perspective on corporate environmental performance and profitability. Academy of

Management Journal40: 534559.Sethi SP. 1979. A conceptual framework for environmental analysis of social issues and evaluation of business response pat-

terns. Academy of Management Review4: 6374.Sharfman M. 1996. The construct validity of the Kinder, Lydenberg & Domini social performance rating data. Journal of Busi-

ness Ethics15: 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 Journal56(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. Econometrica69: 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 Review10: 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 financial performance and firm size: a meta-analysis. Journal of

American Academy of Business8: 163171.

8/2/2019 364_ftp

14/20



DOI: 10.1002/sd

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 GivingThe company has a notably innovative giving program that supports non-profit organizations, particu-larly those promoting self-sufficiency among the economically disadvantaged. Companies that permitnon-traditional federated charitable giving drives in the workplace are often noted in this section aswell.

Non-US Charitable GivingThe company has made a substantial effort to make charitable contributions abroad, as well as in theUS. To qualify, a company must make at least 20% of its giving, or have taken notably innovative initia-tives in its giving program, outside the US.

Support for HousingThe company is a prominent participant in public/private partnerships that support housing initiativesfor 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 educa-tion, particularly for those programs that benefit the economically disadvantaged, or the company hasprominently supported job-training programs for youth.

Other StrengthThe company has either an exceptionally strong volunteer program, in-kind giving program, or engagesin other notably positive community activities.

Community Concerns (COM_CON)

Investment ControversiesThe company is a financial institution whose lending or investment practices have led to controversies,particularly ones related to the Community Reinvestment Act.

Negative Economic ImpactThe companys actions have resulted in major controversies concerning its economic impact on thecommunity. These controversies can include issues related to environmental contamination, water rightsdisputes, plant closings, put-or-pay contracts with trash incinerators, or other company actions thatadversely affect the quality of life, tax base or property values in the community.

8/2/2019 364_ftp

15/20



DOI: 10.1002/sd

Other ConcernThe company is involved with a controversy that has mobilized community opposition, or is engagedin other noteworthy community controversies.

Corporate Governance Strengths (CGOV_STR)

Limited CompensationThe company has recently awarded notably low levels of compensation to its top management or itsboard members. The limit for a rating is total compensation of less than $500 000 per year for a CEOor $30 000 per year for outside directors.

Ownership StrengthThe company owns between 20 and 50% of another company KLD has cited as having an area of stake-holder strength, or is more than 20% owned by a firm that KLD has rated as having stakeholderstrengths. When a company owns more than 50% of another firm, it has a controlling interest, and KLDtreats the second firm as if it is a division of the first.

Other StrengthThe company has an innovative compensation plan for its board or executives, a unique and positivecorporate culture or some other initiative not covered by other KLD ratings.

Corporate Governance Concerns (CGOV_CON)

High CompensationThe company has recently awarded notably high levels of compensation to its top management or itsboard members. The limit for a rating is total compensation of more than $10 million per year for aCEO or $100 000 per year for outside directors.

Tax DisputesThe company has recently been involved in major tax disputes involving more than $100 million withthe Federal, state or local authorities.

Ownership ConcernThe company owns between 20 and 50% of a company KLD has cited as having an area of stakeholderconcern, or is more than 20% owned by a firm KLD has rated as having areas of concern. When acompany owns more than 50% of another firm, it has a controlling interest, and KLD treats the secondfirm as if it is a division of the first.

Other ConcernThe company restated its earnings over an accounting controversy, has other accounting problems oris involved with some other controversy not covered by other KLD ratings.

Diversity Strengths (DIV_STR)

CEOThe companys chief executive officer is a woman or a member of a minority group.

8/2/2019 364_ftp

16/20



DOI: 10.1002/sd

PromotionThe company has made notable progress in the promotion of women and minorities, particularly to linepositions with profit-and-loss responsibilities in the corporation.

Board of DirectorsWomen, minorities and/or the disabled hold four seats or more (with no double counting) on the boardof directors, or one-third or more of the board seats if the board numbers less than 12.

Work/Life BenefitsThe company has outstanding employee benefits or other programs addressing work/life concerns,e.g. childcare, elder care or flextime.

Women and Minority ContractingThe company does at least 5% of its subcontracting, or otherwise has a demonstrably strong record onpurchasing or contracting, with women- and/or minority-owned businesses.

Employment of the DisabledThe company has implemented innovative hiring programs or other innovative human resource pro-grams for the disabled or otherwise has a superior reputation as an employer of the disabled.

Gay and Lesbian PoliciesThe company has implemented notably progressive policies toward its gay and lesbian employees. Inparticular, it provides benefits to the domestic partners of its employees.

Other StrengthThe company has made a notable commitment to diversity that is not covered by other KLD ratings.

Diversity Concerns (DIV_CON)

ControversiesThe company has either paid substantial fines or civil penalties as a result of affirmative action contro-versies, or has otherwise been involved in major controversies related to affirmative action issues.

Non-RepresentationThe company has no women on its board of directors or among its senior line managers.

Other ConcernThe company is involved in diversity controversies not covered by other KLD ratings.

Employee Relations Strengths (EMP_STR)

Cash Profit SharingThe company has a cash profit-sharing program through which it has recently made distributions to amajority of its workforce.

8/2/2019 364_ftp

17/20



DOI: 10.1002/sd

Employee InvolvementThe company strongly encourages worker involvement and/or ownership through stock options avail-able to a majority of its employees, gain sharing, stock ownership, sharing of financial information orparticipation in management decision-making.

Health and Safety StrengthThe company is noted by the US Occupational Health and Safety Administration for its safetyprograms.

Retirement Benefit StrengthThe company has a notably strong retirement benefit program.

Union RelationsThe company has a history of notably strong union relations.

Other StrengthThe company has strong employee relations initiatives not covered by other KLD ratings.

Employee Relations Concerns (EMP_CON)

Union RelationsThe company has a history of notably poor union relations.

Health and Safety ConcernThe company recently has either paid substantial fines or civil penalties for willful violations of employee

health and safety standards, or has been otherwise involved in major health and safety controversies.

Workforce ReductionsThe company has reduced its workforce by 15% in the most recent year or by 25% during the past twoyears, or it has announced plans for such reductions.

Retirement Benefit ConcernThe company has either a substantially underfunded defined benefit pension plan, or an inadequateretirement benefit program.

Other ConcernThe company is involved in an employee relations controversy that is not covered by other KLDratings.

Environment Strengths (ENV_STR)

Beneficial Products and ServicesThe company derives substantial revenues from innovative remediation products, environmental ser-vices or products that promote the efficient use of energy, or it has developed innovative products with

8/2/2019 364_ftp

18/20



DOI: 10.1002/sd

environmental benefits. (The term environmental service does not include services with question-able environmental effects, such as landfills, incinerators, waste-to-energy plants and deep injectionwells.)

Clean EnergyThe company has taken significant measures to reduce its impact on climate change and air pollutionthrough use of renewable energy and clean fuels or through energy efficiency. The company hasdemonstrated a commitment to promoting climate-friendly policies and practices outside its ownoperations.

CommunicationsThe company is a signatory to the CERES Principles, publishes a notably substantive environmentalreport or has notably effective internal communication systems in place for environmental bestpractices.

Pollution PreventionThe company has notably strong pollution prevention programs including both emission reductions andtoxic-use reduction programs.

RecyclingThe company is either a substantial user of recycled materials as raw materials in its manufacturingprocesses or a major factor in the recycling industry.

Other StrengthThe company has demonstrated a superior commitment to management systems, voluntary programsor other environmentally proactive activities.

Environment Concerns (ENV_CON)

Hazardous WasteThe companys liabilities for hazardous waste sites exceed $50 million, or the company has recently paidsubstantial fines or civil penalties for waste management violations.

Regulatory ProblemsThe company has recently paid substantial fines or civil penalties for violations of air, water or otherenvironmental regulations, or it has a pattern of regulatory controversies under the Clean Air Act, CleanWater Act or other major environmental regulations.

Ozone Depleting ChemicalsThe company is among the top manufacturers of ozone depleting chemicals such as HCFCs, methylchloroform, methylene chloride or bromines.

8/2/2019 364_ftp

19/20



DOI: 10.1002/sd

Substantial EmissionsThe companys legal emissions of toxic chemicals (as defined by and reported to the EPA)from individual plants into the air and water are among the highest of the companies followed byKLD.

Agricultural ChemicalsThe company is a substantial producer of agricultural chemicals, i.e. pesticides or chemical fertilizers.

Climate ChangeThe 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 itsderivative fuel products. Such companies include electric utilities, transportation companies with fleetsof vehicles, auto and truck manufacturers and other transportation equipment companies.

Other ConcernThe company has been involved in an environmental controversy that is not covered by other KLDratings.

Human Rights Strengths (HUM_STR)

Indigenous People Relations StrengthThe 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 intellectualproperty of the indigenous peoples.

Labor Rights StrengthThe company has outstanding transparency on overseas sourcing disclosure and monitoring, or hasparticularly good union relations outside the US.

Other StrengthThe company has undertaken exceptional human rights initiatives, including outstanding transparencyor disclosure on human rights issues, or has otherwise shown industry leadership on human rightsissues not covered by other KLD human rights ratings.

Human Rights Concerns (HUM_CON)

Burma ConcernThe company has operations or investment in, or sourcing from, Burma.

Labor Rights ConcernThe companys operations outside the US have had major recent controversies related to employee rela-tions and labor standards or its US operations have had major recent controversies involving sweatshopconditions or child labor.

8/2/2019 364_ftp

20/20


Indigenous People Relations ConcernThe company has been involved in serious controversies with indigenous peoples (either in or outsidethe US) that indicate the company has not respected the sovereignty, land, culture, human rights andintellectual property of indigenous peoples.

Other ConcernThe companys operations outside the US have been the subject of major recent human rights contro-versies not covered by other KLD ratings.

Product Strengths (PRO_STR)

QualityThe company has a long-term, well developed, company-wide quality program, or it has a qualityprogram 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 bringingnotably innovative products to market.

Benefits to Economically DisadvantagedThe company has as part of its basic mission the provision of products or services for the economicallydisadvantaged.

Other StrengthThe companys products have notable social benefits that are highly unusual or unique for itsindustry.

Product Concerns (PRO_CON)

Product SafetyThe company has recently paid substantial fines or civil penalties, or is involved in major recent contro-versies or regulatory actions, relating to the safety of its products and services.

Marketing/Contracting ControversyThe company has recently been involved in major marketing or contracting controversies, or has paidsubstantial fines or civil penalties relating to advertising practices, consumer fraud or governmentcontracting.

AntitrustThe company has recently paid substantial fines or civil penalties for antitrust violations such as pricefixing, collusion or predatory pricing, or is involved in recent major controversies or regulatory actionsrelating to antitrust allegations.

Other ConcernThe company has major controversies with its franchises, is an electric utility with nuclear safety prob-lems, has defective product issues or is involved in other product-related controversies not covered byother KLD ratings.

364_ftp

Documents

Transcript of 364_ftp