Responsibility Is Still Good For Business

By Christopher Flavelle
Sunday, February 15, 2009

For American companies, the theme of the moment is retrenchment: From canceled parties to wide-scale layoffs, the question of necessity is the new standard of corporate decision-making. Does that mean that the corporate social responsibility movement -- which has burgeoned in recent years -- will be jettisoned for the bottom line?

The definition of CSR is ambiguous, but at a minimum it suggests that a company has obligations beyond the requirements of the law to those who are neither its shareholders nor its customers. That idea does not seem controversial today, but as Geoffrey Heal, a professor at Columbia Business School, notes in his book "When Principles Pay," less than 40 years ago, Milton Friedman argued that the sole responsibility of business was to increase profits, creating jobs and wealth in the process -- and most people in business seemed to agree.

Friedman's argument -- which, Heal writes, follows from Adam Smith's idea of the invisible hand -- seems especially relevant today. At a time when so many American companies are unable to generate a profit, and many more are forced to lay off workers, is it reasonable to ask those companies to devote their energy toward anything other than the bottom line? Is it good for them if they do?

"Since the concept of CSR became popular, there's never been a recession like the one we're going into right now," Heal says. "Profits are going to be very hard to come by for many corporations. If they see CSR as contributing to their bottom line, they'll continue to act responsibly. If they see CSR as a kind of a PR campaign, they'll probably cut back on it."

There's the rub: Is CSR, as critics variously suggest, an insurance policy for image-sensitive chief executives and a barrier to innovation? Is it, as Friedman himself put it in his book "Capitalism and Freedom," a "fundamentally subversive doctrine"? Or does CSR actually contribute to a company's bottom line?

We decided on a simple test. The Big Money features an interactive tool called the Socially Responsible Investing Stock Screener (, which ranks 500 of the nation's largest companies according to five categories of behavior: gay and lesbian rights; environmental practices; labor and human rights; whether the company sells military equipment and weapons; and a category called "vice," which covers everything from alcohol and tobacco to gambling and pornography.

Proponents of corporate responsibility argue that how a company behaves affects more than just the community around it; good behavior is also good for the bottom line. For example, in July 2007, Goldman Sachs published a study finding that sustainable companies outperformed the market, often by significant margins. We decided to test that argument by using the SRI Stock Screener and selecting each of the five available criteria, creating a ranked list of 498 companies that represented -- according to IW Financial, the company that compiles the rankings -- a broad view of socially responsible behavior.

We took the 100 most responsible companies and the 100 least responsible and randomly selected a sample of 25 from within each group. For each of those companies, we compared the stock price on Feb. 11, 2008, before the worst of the economic crisis, and 12 months later, on Feb. 10, 2009. Then, for each of those two groups of 25, we calculated the average change in stock price. Had one group been harder hit by the downturn?

It seemed reasonable to expect that, on average, companies with less compunction about their behavior would be better able to weather the downturn, by cutting costs more quickly or by spending less on feel-good environmental programs. That expectation was wrong.

Based on our samples, from February 2008 to February 2009, the stock price of both the more responsible and less responsible companies fell by approximately the same amount -- about 37 percent. (In fact, the stock price of the more responsible companies fell by 1.4 percentage points less than the price of the less responsible companies, but that difference isn't statistically significant for a total sample size of 50 companies.) In the worst economic turmoil in decades, when investors had every reason to shed pretensions of political correctness, companies that put time and energy into behaving responsibly seem, thus far anyway, to have performed no worse than those that didn't.

Unsurprisingly, a number of CSR fund managers insist that responsible behavior helps companies' performance and that a significant differential becomes visible over time. Joe Keefe, the president and chief executive of Pax World Funds, a sustainable-investment fund in Portsmouth, N.H., says that over the long term, say three to five years, companies with better environmental, social, and governance practices tend to have lower risk and smarter management than companies that don't.

"This isn't just a small group of tree-huggers on the left," says Keefe. "We think these types of investments are smart investments."

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