An academic study concluded that Business Ethics’ list of 100 Best Corporate Citizens generated better returns than the remaining companies on the S&P 500.
Last week, Business Ethics announced its third annual list of the 100 Best Corporate Citizens, which appears in the March/April 2002 Issue of the Minneapolis-based magazine. In addition to recognizing companies’ corporate social responsibility (CSR) toward stakeholders that include the environment and the community, the list also ranks companies’ service to shareowners, thus also factoring in financial performance. Interestingly, last year’s list served as the basis for an academic study correlating better social and environmental performance with better financial performance.
"The study shows that overall financial performance of the 2001 Business Ethics Best Citizen companies was significantly better than that of the remaining companies in the S&P 500 index, based on the 2001 Business Week ranking of total financial performance," said DePaul University Professor Curtis C. Verschoor in the January 2002 Strategic Finance magazine article announcing the study, which he conducted in collaboration with Assistant Professor Elizabeth A. Murphy. "The difference between the performance of the Best Citizens and the others was strikingly large," Professor Verschoor continued.
The DePaul study worked from total financial performance rankings conducted by Business Week magazine on the S&P 500 index. The ranking was based on eight statistical criteria, including total return, sales growth, and profit growth over the one-year and three-year periods, as well as net profit margins and return on equity. The Best Citizens scored ten percentile points higher than the mean ranking of the remainder of the S&P 500 companies.
The DePaul University study offers evidence that good corporate citizenship is a superior form of management, said Business Ethics Editor and Publisher Marjorie Kelly. These top companies perform substantially better than their S&P 500 peers, in strictly financial terms. It simply makes sense: managing a company for one measure alone–shareholder value–is like flying a 747 solely for maximum speed. You can shake the plane apart in the process.
Business Ethics’ top five Best Corporate Citizens included: IBM (ticker: IBM), Hewlett-Packard (HWP), Fannie Mae (FNM), St. Paul Companies (SPC), and Procter & Gamble (PG). The top three have been very stable throughout the list’s existence-IBM topped the list two out of the three years, Hewlett-Packard has placed second all three years, and this is the second year running that Fannie Mae came in third place. The overall list is not quite as stable, with half the companies (51) changing over three years.
The list quantitatively ranks companies’ service to seven stakeholder groups: shareowners, employees, customers, the community, the environment, overseas stakeholders, and women and minorities. Sandra Waddock and Samuel Graves of the Carroll School of Management at Boston College performed the statistical analysis of the three-year average total return to shareowners. KLD Research and Analytics, a Boston-based research firm serving socially responsible investors, provided social ratings in the remaining six groups of stakeholders.
Social performance could thus be ranked by category. Business Ethics highlighted how Fannie Mae, which placed third in service to minorities and women, demonstrated its commitment to its customers. The Washington, DC-based provider of home loans has instituted the "American Dream Commitment," a ten-year, $2 trillion program aiming to increase home ownership rates for minorities, new immigrants, young families, and those in low-income communities.
"It is our goal to keep expanding our reach to impaired borrowers and to help lower their costs," said Barry Zigas, senior vice president in Fannie Mae’s National Community Lending Center.
The St. Paul Companies made the most dramatic increase in ranking by jumping from 85th rank last year to fourth place this year. However, it remained quite stable in the category of community citizenship, which it topped for the second straight year. Business Ethics ascribed this success to its innovative and generous philanthropy, giving two percent of net earnings to programs that increase teachers of color, support affordable housing, or promote voluntary civic activity.
Business Ethics stressed that the list does not indicate CSR perfection (an unrealistic expectation), but rather it rewards progress toward better practice of corporate social responsibility.