"Does the Stock Market Fully Value Intangibles? Employee Satisfaction and Equity Prices" - Alex Edmans, January 2010
"Abstract: This paper analyzes the relationship between employee satisfaction and long-run stock returns. A value-weighted portfolio of the "100 Best Companies to Work For in America" earned an annual four-factor alpha of 3.5% from 1984-2009, and 2.1% above industry benchmarks. The results are robust to controls for firm characteristics, different weighting methodologies and the removal of outliers. The Best Companies also exhibited significantly more positive earnings surprises and announcement returns. These findings have three main implications. First, consistent with human capital-centered theories of the firm, employee satisfaction is positively correlated with shareholder returns and need not represent managerial slack. Second, the stock market does not fully value intangibles, even when independently verified by a highly public survey on large firms. Third, certain socially responsible investing ("SRI") screens may improve investment returns."
"Largest-ever analysis of ESG investment studies sees ‘well-founded’ relation to profit" - Adam Brown, IR Magazine, December, 2015
"The largest-ever meta analysis of academic studies on investment guided by ESG principles concludes that the business case for ESG investing is ‘empirically very well-founded’.
The analysis of more than 2,200 academic studies and more than 60 review studies published since the early 1970s concludes that investment based on ESG criteria has a positive effect on corporate financial performance (CPF) that is ‘stable over time’."
"Study Shines Light On Sustainable Investing" - Morgan Stanley Institute for Sustainable Investing, IR Magazine, April, 2015
"A new study from the Institute for Sustainable Investing sets out to reconcile perception and reality. The study examined performance data from 10,228 open-end mutual funds and 2,874 separately managed accounts over the last seven years and found that investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments. This is on both an absolute and a risk-adjusted basis, across asset classes and over time."
"Corporate Sustainability: First Evidence on Materiality" - Mozaffar Khan, George Serafeim & Aaron Yoon, March, 2015
"The relatively new class of corporate investments known as sustainability investments has attracted the attention of firms, institutional investors, academics, and societal advocacy groups. This paper examines in depth how such investments enhance value for shareholders. Results overall show that investments in material sustainability issues can be value-enhancing for shareholders while investments in immaterial sustainability issues have little positive or negative, if any, value implications."
"The Multi-stakeholder Operating System" - David Wolfe, Rick Frazier, January 2010
"A multi-stakeholder operating system turns stakeholders from mostly passive observers and beneficiaries into more active partners in creating value. Who is a stakeholder? Any person or group in a position to experience gain or loss from a company’s operation. Obviously, no company can concern itself directly with all stakeholders coming within the sweep of that definition. Limits must be placed on how broad and deep a company extends its outreach to stakeholders. We suggest organizations should focus their attention on five primary stakeholders: Customers, Employees, Suppliers, Communities and Investors."
"The Multi-stakeholder Operating System and CSR" - Rick Frazier, June 2010
"For instance, consider a company that enjoys a strong positive reputation for being a good corporate citizen. A legitimate question from an investor’s perspective is, “How much does this contribute to growth and profitability?” Advocates for the company might feel that its corporate citizenship practices account for some increment of growth and profitability. However, unless a company has bothered to build a causal model and communicate the output from the model, the reality is that no one really knows. Thus, the task of linking companies’ social responsibility profiles to their financial performance tends to be more subjectively determined than the product of statistically rigorous analysis."
The authors analyzed a matched sample of 180 “High Sustainability” companies and “Low Sustainability” companies over an 17-year period (1993-2009). They found that the High Sustainability group outperformed the Low Sustainability group by 4.8 percent on a value-weighted base. The outperformance is stronger in sectors where the customers are sinking iceberg of business value individual consumers, where companies compete on the basis of brands and reputation, and where companies’ products significantly depend upon extracting large amounts of natural resources.
"GMI Ratings Releases Global Data Comparing the Equity Performance of Companies with Top-Decile and Bottom-Decile Accounting and Governance Risk (AGR®) Ratings" - BusinessWire, August, 2012
AGR is GMI Ratings’ proprietary measure of the investment risk of approximately 18,000 companies worldwide. AGR reflects a broad spectrum of accounting irregularities and weaknesses in corporate governance statistically associated with an elevated risk of anomalous events likely to cause precipitous contractions in equity value. Over the 10-year period ended July 1, 2012, a portfolio of companies with top-decile AGR ratings would have outperformed the lowest-decile portfolio by 55%. Note GMI is now part of MSCI. and their GMI Rating is part of the MSCI Governance Metrics.
"The Corporate Library Finds Higher Investment Returns After Screening for Corporate Governance Risk" - MarketWire, April 2009
A study published by The Corporate Library, an independent corporate governance research firm, found that screening for corporate governance risk may yield superior investment returns. The study, conducted by a third-party analytics firm, compared the performance of a hypothetical "Governance Alpha Fund" (GAF) with the Russell 1000 benchmark over a seven-year period. The hypothetical GAF was created using an exclusionary screen based on The Corporate Library's historical, proprietary governance risk ratings. Over the period of seven years, the GAF outperformed the benchmark by more than 100 annualized basis points.
"Value Destruction and Financial Reporting Decisions" - John R. Graham, Campbell R. Harvey, and Shiva Rajgopal, 2006
"Abstract: The comprehensive survey reported here allowed analysis of how senior U.S. financial executives make decisions related to performance measurement and voluntary disclosure. Chief financial officers were asked what earnings benchmarks they cared about and which factors motivated executives to exercise discretion—even sacrifice economic value—to deliver earnings. These issues are crucially linked to stock market performance. The results show that the destruction of shareholder value through legal means is pervasive, perhaps even a routine way of doing business. Indeed, the amount of value destroyed by companies striving to hit earnings targets exceeds the value lost in recent high-profile fraud cases."
"Customer Value Governance: The Emerging Corporate Imperative" - Richard J. Frazier and Gerard F. McDonough, 2002
"Most corporate leaders and financial analysts would agree that long-term shareholder value is created by consistently providing value to customers in an economically profitable manner. Customer value governance is a strategy to achieve this corporate imperative. It ensures growth is both profitable and capital efficient while building reliable indicators of future performance.
Customer value makes an eye-popping contribution to the market value placed on companies with large, complex customer portfolios, yet investors and analysts are seldom provided with sufficient information to accurately gauge the health of this core asset. This unnecessarily creates higher perceived risk, and in turn, increases your cost of capital. The uncertainty surrounding this lack of information is alleviated by opting to disclose how customer value is being measured, monitored and maximized. Customer value governance makes this option possible."
"Decades ahead of her time: Advancing stakeholder theory through the ideas of Mary Parker Follett" - Melissa A. Schilling, July 2000
“Though the work of Mary Parker Follett predates the field of stakeholder theory by almost 60 years, and no reference to her work is found in the stakeholder literature, many of the tenets of stakeholder theory echo Follett’s ideas precisely. More importantly, Follett’s work yields a much richer foundation for stakeholder theory, as well as providing direction for its advancement. The article traces both the similarities and differences between Follett’s work and that of contemporary stakeholder theorists, and shows how Follett’s ideas can be used to enhance our current understanding of the theory and improve its implementation.”
"The Social Responsibility of Business is to Increase its Profits" - Milton Friedman , NY Times Magazine, September 1970
“In a free-enterprise, private-property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.”
"Milton Friedman Was Wrong About Corporate Social Responsibility" - John Friedman , Huffington Post, August, 2013
“Any business, if its wants to be sustained over time, must maximize its profits but do so in a manner that meets the needs of the stakeholders that allow it to remain viable. When those needs change, businesses have a responsibility to adapt their behaviors accordingly if it wishes to survive. That is the piece that Mr. Friedman’s argument missed. The rules of the game have changed in fundamental ways — and people today expect (and demand) more of business than simply that they maximize their profits without coming to grief by some violation of law.”
"Department of Labor Clarifies ERISA Fiduciary Requirements With Respect to Economically Targeted Investments and Environmental, Social, and Governance Goals" - By Susan Mac Cormac, Paul Borden, Kristin Hiensch, and Jesse Finfrock, November 2015
"Last month, the Department of Labor (the “Department”) issued an Interpretive Bulletin 2015-011 (the “Bulletin”) clarifying the extent to which the Employee Retirement Income Security Act of 1974 (“ERISA”) permits fiduciaries to consider environmental, social, and governance (“ESG”) factors or “economically targeted investments” (“ETIs”) in their plan investment choices. The Department noted that the terms ESG and ETI are evolving but generally described such investments as ones selected, at least in part, “because of the collateral economic or social benefits they may further in addition to their investment returns.”
Under this new guidance, plan fiduciaries should consider ESG factors when such factors reasonably impact an investment’s financial return or
risk profile. In addition, the Department recognized that fiduciaries may consider ESG factors or ETIs as “tie-breakers” when deciding between investment alternatives that are otherwise equal in terms of risk and return."
"The Bottom Line: Corporate Performance and Women’s Representation on Boards (2004–2008)" - Catalyst
Companies with the most women board directors (WBD) outperform those with the least on ROS by 16 percent.
Companies with the most WBD outperform those with the least on ROIC by 26 percent.
Companies with sustained high representation of WBD, defined as those with three or more WBD in at least four of five years, significantly outperformed those with sustained low representation by 84 percent on ROS, by 60 percent on ROIC, and by 46 percent on ROE
"Board Gender Diversity, Innovation and Firm Performance", Jie Chen, Woon Sau Leung and Kevin P Evans, May 25, 2015
"Abstract: We find that firms with more gender-diverse boards achieve greater innovative success. The results are not driven by endogenous matching between female directors and firms with high innovative potential. Investigating the underlying mechanisms, the positive effect of gender diversity on innovation is stronger when product market competition is lower and when managers are more entrenched, consistent with increased monitoring by female directors improving manager’s incentives to innovate. Furthermore, we find that although gender diversity does not enhance firm performance on average, it increases the performance of firms for which innovation and creativity play a particularly important role."
"Despite a large body of literature examining the relationship between women on boards and firm financial performance, the evidence is mixed. To reconcile the conflicting results, we statistically combine the results from 140 studies and examine whether these results vary by firms’ legal/regulatory and socio-cultural contexts. We find that female board representation is positively related to accounting returns and that this relationship is more positive in countries with stronger shareholder protections—perhaps because shareholder protections motivate boards to use the different knowledge, experience, and values that each member brings. We also find that, although the relationship between female board representation and market performance is near zero the relationship is positive in countries with greater gender parity (and negative in countries with low gender parity)—perhaps because societal gender differences in human capital may influence investors’ evaluations of the future earning potential of firms that have more female directors. Lastly, we find that female board representation is positively related to boards’ two primary responsibilities: monitoring and strategy involvement. For both firm financial performance and board activities, we find mean effect sizes comparable to those found in meta-analyses of other aspects of board composition. We discuss the theoretical and practical implications of our findings."