MONTHLY NEWS ITEM
August 2000
WILL SOCIAL RESPONSIBILITY BURN UP THE BOTTOM LINE?
In the UK the Government has asked investment and pension funds to report on how their investments contribute to social and ethical responsibility. The impact of this ruling has already made leading insurers and pension funds to put pressure on companies to improve social and environmental standards. This issue will directly affect corporate and brand reputations, commercial success and their share price, according to Roger Cowe of ‘The Guardian’.
But does increased social responsibility lead to better financial performance and an increased share price? Research in The Planetary Bargain (see Publications) showed that share price and level of corporate responsibility had a weak positive correlation. This is backed up by recent work by Sandra Waddock of Boston College (see http://www2.bc.edu/~waddock/) who has shown that visionary companies can have a premium of over 5% over non-visionary companies. Visionary companies have had better social performance than non-visionary ones. This is illustrated in the following graph:
Copyright MHC International Ltd
The graph illustrates the ‘J-curve’ effect whereby a companies’ share price at t0 falls to t1when news gets out about the companies’ new values as published in its social report. However, as the company starts to implement its new social programme through a new set of processes the share price recovers to its previous value at t2 and then, when targeted outputs are attained, achieves its corporate responsibility premium at t* . The graph illustrates the ‘Body Shop’ or ‘Nike’ effect whereby putting one’s head above water leads to getting into hot water but, eventually, this turns around into increased market value. Indeed a comparison of visionary and non-visionary companies shows that the average premium is around 5% on share price alone. The model of values, processes and outputs is used in MHCi‘s indicator set for measuring corporate social performance and in the CRITICS questionnaire on this web site – see CRITICS
[Contributed by Michael Hopkins]